Madoff Feeder Fund’s $6 Billion Clawback Attempt Shut Down in Appeals Court

Originally posted on the Wall Street Journal

An appeals court has blocked liquidators’ yearslong effort to recover about $6 billion from investors who cashed out of a Bernie Madoff feeder fund before the Ponzi scheme collapsed.

The U.S. Court of Appeals for the Second Circuit ruled Tuesday that the liquidators of Fairfield Sentry, a British Virgin Islands-based investment vehicle that funneled client money to Madoff Investment Securities, can’t claw back redemption payments.

Fairfield Sentry raised money and invested it with Madoff until his scheme unraveled in December 2008. In the weeks before the Securities and Exchange Commission revealed the fraud, some investors redeemed their shares for cash.

After Madoff’s collapse, Fairfield Sentry filed for insolvency in the British Virgin Islands in 2009 and sought chapter 15 protection in the U.S. the following year. The liquidators have tried to claw back the payments for years.

A U.S. bankruptcy judge dismissed most of these attempts, citing a lack of jurisdiction and the bankruptcy code’s safe-harbor provision that shields many prebankruptcy dealings from the reach of creditors, court papers show. 

The bankruptcy court upheld some claims, saying that some defendants knew or had reason to know that the calculations of the value of the shares they redeemed were inflated. A district court upheld this split decision. 

A panel of three judges for the Second Circuit Court of Appeals reversed the decision in part, tossing out the remaining claims. 

“We hold that all of the liquidators’ claims should have been dismissed pursuant to the safe harbor for securities transactions” under bankruptcy law, the panel of judges wrote in their decision.

“We are pleased with the outcome of this case and with the decision by the Second Circuit,” said Jeffrey A. Rosenthal of Cleary Gottlieb Steen & Hamilton, who represents the investors who redeemed their shares.