A federal appeals court revived almost 100 lawsuits seeking what may be as much as $2 billion lost from Bernard Madoff’s Ponzi scheme when the cash was transferred overseas.
The decision Monday by the U.S. Court of Appeals in Manhattan reverses a 2016 ruling that benefited foreign customers of offshore "feeder funds," which invested mostly with Madoff’s advisory firm. Those investors allegedly withdrew more money than they put in before the scheme collapsed in 2008.
The lower court had ruled that U.S. law didn’t apply to the overseas transfers. The appeals court said otherwise, noting that offshore investors, which included a company owned by the billionaire brothers Charles and David Koch, shouldn’t be “surprised” that the disputed transfers are subject to American rules.
“When these investors chose to buy into feeder funds that placed all or substantially all of their assets with Madoff Securities, they knew where their money was going,” a three-judge panel said.
The litigation involves the biggest remaining pot of cash sought by the trustee, Irving Picard, who has been seeking to make whole customers who lost $19 billion in principal after Madoff’s 2008 arrest. So far he’s recovered more than $13 billion through settlements and distributed more than $12 billion to victims -- significantly more than some predicted a decade ago.
The money involved in the appeals-court cases was unusual because it was subject to two foreign transfers. The first was from Madoff’s New York bank to offshore funds that were his direct customers, and then again by the funds to their own offshore customers.
In 2014, the defendants first claimed a victory when U.S. District Judge Jed Rakoff said that money transferred overseas is generally out of Picard’s reach and sent the cases back to bankruptcy court for further arguments. U.S. District Judge Stuart Bernstein then affirmed Rakoff’s ruling in November 2016.
Creating Loophole
The appeals court said that the earlier rulings would open a loophole that could allow a fraudster who is “anticipating his downfall” to move stolen money from a trustee’s reach by using a series of foreign transfers.
“We cannot imagine how it should guide us to read the Bankruptcy Code’s creditorâprotection provisions in this selfâdefeating way,” the appellate court said.
Among the defendants was a company controlled by the Koch brothers that invested with Madoff through an offshore fund and withdrew $21.5 million in profits before Madoff’s arrest in 2008. In the Koch case, the money was sent in 2005 to a fund based in the British Virgin Islands, and then to a Koch entity in the U.K., according to court filings.