The United States Court of Appeals for the Second Circuit issued a major decision today in the “claw-back” litigation resulting from the massive fraud perpetrated by Bernard Madoff. Unanimously affirming a district court decision, the Second Circuit ruled that the so-called “stockbroker” defense contained in Bankruptcy Code Section 546(e) prevents the trustee liquidating Madoff’s former brokerage firm from recovering certain older withdrawals made by Madoff victims who had no knowledge of Madoff’s fraud. The trustee had been attempting to recover such payments made as early as six years before the commencement of the Madoff liquidation. The Second Circuit’s decision functionally limits the trustee to pursuing only withdrawals made within the two years prior to the bankruptcy. The ruling also bars the trustee from pursuing preferential transfers made to innocent Madoff victims.
The Second Circuit’s decision will allow good-faith Madoff victim defendants to retain, in total, approximately $1.6 billion dollars withdrawn from the Madoff brokerage firm. A copy of the decision is attached.
Loeb & Loeb LLP, led by partners P. Gregory Schwed and Daniel B. Besikof, was one of three firms that briefed and argued the appeal in the Second Circuit, as part of a multi-law firm good-faith customer joint defense team.
“We think the Second Circuit got it exactly right,” said Schwed. “The Court’s ruling sharply restricts the Trustee’s litigation campaign against innocent victims of Madoff’s fraud – many of them retirees whose savings were wiped out by Madoff’s fraud. This ruling respects the balance set by Congress between the Trustee’s goal of collecting money and the right of Madoff victims to keep amounts they received in good faith many years ago. It’s obviously great news for our clients, as well as the other 1,600 defrauded Madoff customers who will no longer need to worry about $1.6 billion in claw-back exposure.”