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Madoff trustee OK'd to seek clawback of $50 million in former client funds

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November 2, 2021 - The liquidating trustee for the brokerage firm of deceased securities fraudster Bernie Madoff can proceed with claims to recoup $50 million in former clients' funds from two firms that received the funds from a Madoff investor, a Manhattan bankruptcy judge has ruled.

In re Madoff, 08-1789; Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC, Adv. No. 20-1316, 2021 WL 4994435 (Bankr. S.D.N.Y. Oct. 27, 2021).

Irving Picard asserted plausible grounds to infer that companies controlled by Rafael and David Mayer, including Khronos Liquid Opportunities Fund Limited, received subsequent transfers from a former investor of Bernard L. Madoff Investment Securities LLC, Chief U.S. Bankruptcy Judge Cecelia G. Morris of the Southern District of New York said Oct. 27 in denying motions to dismiss.

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Following Madoff's arrest for securities crimes in 2008, Picard was appointed trustee for the brokerage firm pursuant to the Securities Investor Protection Act, 15 U.S.C.A. § 78aaa. Subsequently, the case was referred to the Bankruptcy Court.

Later, Picard sued Legacy Capital Limited, a single-purpose vehicle invested solely with BLMIS. Legacy settled the suit in 2019, admitting that it had received $79 million in fraudulent transfers from the debtor that could be recovered under Section 548(a)(1)(A) of the Bankruptcy Code, 11 U.S.C.A. § 548(a)(1)(A).

Section 548(a)(1)(A) allows a trustee to avoid a debtor's fraudulent transfers made just prior to filing for bankruptcy.

Meanwhile, Legacy had transferred $77 million to Montpellier International Limited in 2007 and $10 million to Prince Assets Limited in 2008, the opinion said.

Picard alleged that after learning of BLMIS' fraud, brothers Rafael and David Mayer, who controlled Montpellier and Prince Assets, respectively, liquidated the two firms and transferred the Legacy funds to other entities they ran, including Khronos.

In 2020, the trustee filed an adversary complaint against Khronos and the Mayers, among others, over those transfers, alleging $39.5 million of Montpellier's payments and the entirety of Prince Assets' payments had been fictitious profits. Further, he alleged the Mayers are personally liable for the subsequent transfers as alter egos of their entities.

Under Section 550(a) of the Bankruptcy Code, 11 U.S.C.A. § 550(a), a trustee "may recover, for the benefit of the estate" the value of any avoidable transfers from an initial transferee of such transfer or "any immediate or mediate transferee of such initial transferee."

In March, Khronos and the Mayers moved to dismiss the complaint for failure to state a claim, contending that Picard failed to allege the funds at issue originated with BLMIS or to describe the purported transfers with enough specificity.

Judge Morris disagreed that the trustee had failed to state a claim against the defendants.

Picard's complaint includes allegations that the Mayers and others initially registered Khronos Liquid in 2011 and that a Mayer-controlled entity transferred funds to Khronos Liquid in July 2016, according to the opinion.

Thus, "the complaint contains sufficient information regarding which transfers the trustee is seeking to recover," the judge said.

Consequently, those allegations "contain plausible grounds to infer that Khronos Liquid received the subsequent transfers as part of a scheme and that discovery may reveal additional information on this scheme," she concluded.

David J. Sheehan and Oren J. Warshavsky of Baker & Hostetler LLP represented the trustee. Daniel S. Alter of Yankwitt LLP represented Khronos. Eric B. Fisher of Binder & Schwartz LLP represented Rafael Mayer, and Eugene E. Stearns of Stearns, Weaver, Miller, Weissler, Alhadeff & Sitterson PA represented David Mayer.

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