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The Wall Street
Journal's Bankruptcy Beat blog yesterday featured a conversation with
bankruptcy attorney Kathy Bazoian Phelps of Danning, Gill, Diamond &
Kollitz, LLP, co-author of the The Ponzi Book: A Legal Resource for Unraveling Ponzi Schemes and author of the The Ponzi Blog, about the Mets $162 million settlement
with the Madoff bankruptcy estate. In
the article, Phelps expressed her disappointment that the settlement
forestalled a deeper examination of two common defenses used in Ponzi-scheme related litigation. The first defense cited by Mets owners Fred Wilpon and
Saul Katz was that they acted in "good faith" when, as alleged, the unrealistic
profits they garnered from their investment in Madoff's funds should have
raised red flags as to the legitimacy of the investment. A jury finding that Wilpon
and Katz acted with "willful blindness" could have resulted in a jury verdict
in favor of Madoff trustee Irving Picard for as much as $386 million. The
other defense claimed by the Mets owners was the "stockbroker harbor" defense,
which creates a safe harbor for transfers constituting settlement payments made
by a stockbroker. In a prior decision in the Picard v. Katz case, Judge
Rakoff had upheld the defense as to all transfers other than those made with
actual fraudulent intent, which eliminated nearly $1 billion of Picard's
claims. The bankruptcy court in the Madoff case had previously declined
to allow this defense in other cases given the fraudulent nature of Madoff's
scheme. Since this is a zero sum defense, Phelps noted that this is a
"huge issue for trustees" which will now not be resolved by an appellate court
in light of the settlement.
Read the WSJ Bankruptcy Beat
See also: Stockbroker Safe Harbor Defense in Ponzi Schemes Remains Unresolved Following Picard v. Katz Settlement
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