Articles tagged with: Ponzi Scheme

materials addressing actual, virtual or pseudo Ponzi schemes in bankruptcy preference, fraudulent conveyance, other avoidance actions

Chapter 7 Trustee Starts Dean & Moore Insurance, Inc. Bankruptcy Transfer Avoidance Proceedings

On August 5, 2011, Tamara Miles Ogier, Trustee in the Dean & Moore Insurance, Inc. Bankruptcy, commenced Chapter 5 preferential transfer recovery litigation with the filing of 29 complaints – 23 complaints include Georgia fraudulent conveyance claims O.C.G.A. Sec. 18-2-70; 12 include Section 548 fraudulent conveyance claims; certain complaints also include equitable subordination, other state law claims and a preferential transfer claim complaints in the Northern District of Georgia (Atlanta). The Debtor operated an insurance agency. The Trustee admits that the Debtor conducted both “legitimate and illegitimate” operations. The Trustee claims, however, that the Debtor’s activities constituted a Ponzi scheme, based in part on “obtaining policies for fictitious persons and entities and other activities that allowed Debtor to obtain funds through fraudulent representations.”

Irving H. Picard, Esq. v. Citibank, N.A. et al – Memorandum of Law in Support of Motion to Dismiss

07/26/2011 – Memorandum of Law in Support of Citibank N.A., Citicorp North America, Inc. and Citigroup Global Markets Limiteds Motion to Dismiss the Trustees Complaint filed in the Bernard l. Madoff Investment Securities LLC Adversary Proceedings by Citibank, N.A. et al before Judge U.S. Bankrutpcy Judge Burton R. Lifland in the Southern District of New York (Manhattan) filed by  Cleary Gottlieb Steen & Hamilton LLP Carmine D. Boccuzzi, Jr. (New York, New York) attorneys David Y. Livshiz, Jr. and David Y. Livshiz.

Defendants Citibank, N.A., Citicorp North America, Inc.’ (“CNAI,” and together with Citibank, N.A., “Citibank”) and Citigroup Global Markets Limited (“CGML” and collectively with Citibank, “the Citi Defendants”) challenge Trustee Irving H. Picard’s effort to “clawback” four transfers, in the aggregate amount of $430 million, received by CGMI, and Citibank as purported subsequent transferees from Fairfield Sentry Limited (“Sentry”) and the Rye Select Broad Market Prime Fund, L.P. (“Prime Fund”). Defendants make three arguments in support of their motion to dismiss the Trustee’s thirteen count complaint to recover transfers on preference, constructive fraudulent conveyance and state law theories. The Defendants argue that the “safe harbors” of sections 546(e) and (g) of the Code protect the Defendants from avoidance the transfers at issue. Additionally, the Defendants claim that the Complaint fails to adequately plead recovery of the transfers under Section 550. However, this memorandum of law is significant for argument that, in the case of Sentry, “the Trustee has expressly relinquished his ability to ever avoid the initial transfers by entering into a settlement agreement with Sentry and agreeing to the entry of a consent judgment that does not avoid the alleged initial transfers.” Registered users click here to see a copy of this brief.

W.D. Missouri Bankruptcy Court Rejects Pseudo Ponzi Scheme Challenge to Ordinary Course Preference Defense

Western District of Missouri Bankruptcy Judge Dennis R. Dow holds that, in this bankruptcy preference action against trade creditors (the “Defendants”), the source of funds is irrelevant to the determination of the application of the §547(c)(2) ordinary course defense.  The Chapter 7 trustee (the “Trustee”) argued that the source of the funds debtors Joseph and Rebecca Graff (the “Debtors”) used to pay the Defendants was inconsistent with the ordinary course defense.  The Trustee attempted to bootstrap case authority denying the ordinary course of business defense as to payments to investors in a “Ponzi scheme”.  The Court rejected the argument.  This decision addresses an issue of increasing importance as Chapter 7 trustees seek to apply the Ponzi scheme label to legitimate business dealings in order to establish the prima facie elements of preference claims and defeat preference defenses.

Bankruptcy Court Opinion in In re Drier of Significance to Ponzi Scheme Avoidance Action Defendants

Southern District of New York Bankruptcy Judge Martin Glenn issues an exhaustive opinion that presents a mixed bag of good and bad news for avoidance action defendants who received Ponzi scheme payments.  Among the issues addressed in the opinion are:  the applicability of the “Ponzi scheme presumption” to actual fraudulent conveyance claims under § 548(a)(1)(A); the lack of a “mutual fraudulent intent” requirement under NYDCL § 276; the inability of the Trustee to pursue claims for  constructive fraudulent conveyance under § 548(a)(1)(B) as to repayment of  investor principal; and the inability of the Trustee to pursue  constructive fraudulent conveyance claims under the NYDCL where repayment satisfied an antecedent debt. 

Bernard L. Madoff Bankruptcy: Irving H. Picard v. Weithorn/Casper Associates for Selected Holdings, LLC – Defendants Memorandum of Law in Support of Motion to Dismiss Complaint

The Defendants acknowledge that they are swimming upstream with this motion that both seeks dismissal based on an affirmative defense and is based on an interpretation of Section 546(e) that seemingly has been consistently rejected in prior court decisions. It is the Defendants’ arguments to distinguish the prior, adverse decisions on the applicability of Section 546(e) that especially make this decision noteworthy. In particular, the Defendants attempt to distinguish existing authority because here the Defendants are “not alleged to have any knowledge or participation in the fraudulent activities of Madoff; nor are they alleged to have received any of the transfers in bad faith.”

Bernard L. Madoff Bankruptcy: Irving H. Picard v. Wiener et al – Defendant’s Memorandum of Law in Support of Motion to Dismiss

06/01/2011 – Defendant’s Memorandum of Law in Support of Motion to Dismiss filed in the Bernard L. Madoff Bankruptcy Adversary Proceedings brought by Irving H. Picard against Weiner et al before Judge Lifland in the Southern District of New York (Manhattan).

This is a probing, broad based motion to dismiss, challenging every count of the Trustee’s 7 count complaint. The motion to dismiss initially attacks the Trustee pleading of actual fraudulent transfers and in particular the element of actual fraudulent intent. However, the focus of the motion to dismiss is heavily weighted toward Picard’s claims based on the transfers being constructive fraudulent conveyances under the New York Debtor and Creditor Law (“NYDCL”). It is this aspect of the motion that most makes it noteworthy.

Irving H. Picard, Trustee v. L.H. Rich Companies et al – Defendants’ Motion to Dismiss

05/10/2011 – Motion to Dismiss filed in the Madoff Adversary Proceedings by L.H. Rich Companies et al before Judge Lifland in the Southern District of New York (Manhattan).  The Defendants seek dismissal of the avoidance claims of Trustee Picard pursuant to Fed. R. Civ. P. 12(b)(5) for insufficient service of process and Fed. R. Civ. P. 12(b)(6) for failure to state a claim upon which relief can be granted. The latter grounds are based on “conclusory allegations as to subsequent transferees.” Dismissal of the proceedings, however, is only one of the options available to the Court to address the challenges. The courts holding on the “substantive” issues will be less instructive to other defendants than the steps ordered by the Court to redress the deficiencies in service and pleading. Registered users, click this link to see the filing.*

Madoff Trustee Files Hundreds of Avoidable Transfer Recovery Proceedings against Former Madoff Clients

The long anticipated avoidable transfer recovery proceedings against former clients of Bernard L. Madoff commenced being filed on November 26, 2010 and by December 4, 2010, the total number of complaints filed reached 887 (update April 05, 2011 – a total of 1057 avoidance actions were filed after November 26, 2010).  The complaints were filed by  Irving H. Picard, as trustee (the “Trustee”)  in the substantively consolidated proceeding brought under the Securities Investor Protection Act (“SIPA”) for the liquidation of the business of Bernard L. Madoff Investment Securities LLC and the bankruptcy estate of Bernard L. Madoff , individually (collectively “Madoff”).  The statutory grounds for the avoidance actions include Sections 547- Preferences and 548 – Fraudulent Transfers – under the Bankruptcy Code.  This note provides a cursory overview of the avoidance actions.