Herrick, Feinstein LLP on the Madoff Litigation Landscape

Herrick, Feinstein LLP on the Madoff Litigation Landscape

Despite having several options for restitution, Madoff victims face a return of mere pennies and the possibility of years of litigation. In this Commentary, Therese M. Doherty, Howard R. Elisofon and John Oleske of the New York City-based law firm Herrick, Feinstein, LLP examine the litigation strategies and courses of action for the victims of Bernard Madoff's Ponzi scheme and conclude that the best that most can hope for is not to actually lose even more. They write:

 
     For those victims who invested directly in the Madoff brokerage, SIPC [Securities Investor Protection Corporation] is bound by statute to provide $500,000 in coverage for losses in securities, and $100,000 for losses in cash. The relevant case law indicates that because Madoff brokerage victims received statements indicating that they owned securities (even though they did not), they should be paid the $500,000 maximum and not limited to the $100,000 cash coverage payout. To date, the trustee has paid on only a handful of claims -- the most obvious ones at that, albeit at the $500,000 level -- leaving us uncertain as to how he will proceed on the bulk of the claims. Given that SIPC is a private insurer and that being statutorily eligible for coverage is not tantamount to receiving it, we find it conceivable that SIPC will seek to deny coverage on claims, spawning coverage litigation.
 
     . . . .
 
     Some victims have retained our firm to bring actions against the Securities and Exchange Commission on a theory of negligence. They allege that if the SEC had performed its auditing, information-reporting, and investigative functions with ordinary care, the Madoff Ponzi scheme would have been exposed long ago, and, as a result, they never would have made the investments that led to their massive losses. At this time, we have filed two such claims, and anticipate filing at least a half-dozen more in the near future.
 
     . . . .
 
     Redemptions that were made shortly before the collapse allow the SIPC trustee to invoke the preferential transfer bankruptcy statute, meaning that the trustee can avoid the entire transfer without distinguishing between profits and principal, or indeed, without making any other showing. The trustee has already instituted one such action, demanding the return of $150 million that was redeemed less than two months prior to the collapse. (Under the preferential transfer law, the trustee can avoid transfers made within 90 days of his appointment). The trustee is likely to go after these easy targets first, but even redemptions made outside the 90-day preferential transfer window remain highly vulnerable to clawback.
 
 
(citations omitted)

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