The trustee tasked with recovering funds for victims of Bernard Madoff's $65 billion Ponzi scheme announced he had reached a settlement with a Connecticut hedge fund that acted as a "feeder fund" in shoveling millions of dollars into Madoff's scheme. Irving Picard, the court-appointed trustee, recently sought court approval for a settlement with Maxam Absolute Return Fund ("Maxam") that called for the return of nearly $98 million in funds that had been withdrawn from Madoff's scheme just before its collapse. In return, an allowed claim of over $276 million will be recognized on behalf of Maxam, which will be permitted to share in future distributions to investors. The settlement brings the total amount of funds recovered by Picard to nearly $9.5 billion - with total allowed claims to date of just over $11 billion.
Picard sued Maxam in December 2010, as well as its founder, Sandra Manzke, and several of her family members. In the lawsuit, Picard alleged that Maxam and its principals disregarded well-known red flags surrounding Madoff's brokerage to take advantage of the steady and constant returns offered. Indeed, despite the detailed procedure set forth in Maxam's due diligence questionnaires, S. Manzke later testified that no due diligence was performed - rather, the investment was simply a continuation of an earlier investment made while she served as CEO of Tremont Capital Managment ("Tremont"). Maxam invested nearly $300 million into Madoff's scheme, and in the two years preceding Madoff's fraud, withdrew a total of over $97 million.
Under the terms of the settlement with Picard, Maxam will return the nearly $98 million it withdrew in the two years preceding the bankruptcy filing by Madoff's brokerage firm. In return, Picard will drop all litigation against Maxam and the individual parties, and will recognize an allowed claim on behalf of Maxam in the amount of $276,687,000.00 (the "Allowed Claim"). Based on the amount of funds recovered by Picard since his appointment, it is likely that Maxam will recover a significant portion of that amount.
Under federal bankruptcy laws, a bankruptcy trustee may recover transfers received by a defendant within two years of the bankruptcy petition date under 11 U.S.C. § 548(a)(1)(A). Once actual fraud is established (which is satisfied by the finding that the perpetrator operated a Ponzi scheme), a defendant must then demonstrate that he/she both received the transfers in good faith and provided value. See 11 U.S.C. § 548(c). Here, while it is typically understood that an investor gives "value" when receiving redemptions of their principal investment (that is, the amount of their withdrawals has not yet eclipsed the total principal amount of their investment), the dispute likely centered on whether Maxam had taken the withdrawals in good faith. Indeed, Picard's complaint is rife with allegations that Maxam disregarded, ignored, and flouted their purported due diligence procedures in an attempt to show that obvious red flags were ignored in the pursuit of above-average profits from Madoff's scheme. Relevant caselaw has required that a transferee must demonstrate the undertaking of a diligent investigation, and a simple inquiry with the schemer is not sufficient. Thus, the decision to settle likely took into account the evidence that Maxam had not properly conducted due diligence.
Coincidentally, S. Manzke formed Maxam in 2005 after leaving her previous position as CEO of Tremont Capital Management ("Tremont"), which later reached a $1 billion settlement with Picard over its Madoff exposure.
A copy of the Settlement Motion is here.
For more news and analysis of Ponzi schemes, visit Ponzitracker, a blog by Jordan Maglich, an attorney at Wiand Guerra King P.L.
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