John Quinn is joined by Robert Loigman, partner in Quinn Emanuel’s New York office, and Eric Winston, partner in Quinn Emanuel’s Los Angeles office.  They discuss the extensive litigation that has followed the 2008 collapse of Bernie Madoff’s Ponzi scheme.  The litigation stems from a liquidation by a court-appointed trustee under the Securities Investor Protection Act (SIPA).  The primary goal of the liquidation was to recover assets for Madoff’s victims.  The litigation has continued for 17 years, so far, because of the number of parties involved and the multitude of proceedings and appeals in both the U.S. and foreign courts.

The trustee has pursued clawback claims against “feeder funds” under fraudulent transfer theories, targeting both “net winners” who withdrew more than they invested and “net losers” who withdrew less than they invested.  After the estate recovered $7 billion recovery from one feeder fund, investors began to anticipate higher recoveries than normally occur in SIPA proceedings.  Over time, a secondary market in Madoff claims developed, with distressed asset investors buying claims at steep discounts and profiting when recoveries exceeded expectations.  

The Madoff litigation has led to several significant legal developments.  One key issue involved included the safe harbor under the Bankruptcy Code for good faith conduct.  Initially, a judge in the SDNY ruled that to show a lack of good faith, a trustee must show that an investor was willfully blind to the fraud at issue.  In 2021, the Second Circuit ruled that simple inquiry notice is enough, placing a greater burden on investors to investigate irregularities.

Another significant legal development was the Second Circuit’s ruling that U.S. bankruptcy law could reach transfers between foreign debtors and foreign transferees, expanding the potential reach of clawback efforts.  

Finally, the Second Circuit ruled that in a Chapter 15 bankruptcy case, certain U.S. standards would apply to transactions between foreign entities even though the foreign courts with jurisdiction over the entities would apply different standards.

The uniquely large and visible fraud in the Madoff litigation case may have led courts to expand legal doctrines in ways that affect bankruptcy and investor litigation more generally.

Podcast Link: Law-disrupted.fm
Host: John B. Quinn
Producer: Alexis Hyde
Music and Editing by: Alexander Rossi