RPR&C In The Media

August 18, 2014

By Andrew Scurria

Irving Picard has wowed the investment world by recovering more than $9 billion for victims of the Bernard L. Madoff Ponzi scheme, but attorneys say the superstar trustee’s juggernaut may finally be losing steam as a judicial backlash against his tactics emboldens the remaining holdouts.

By all accounts, Picard has taken it on the chin lately, with the New York courts overseeing the Bernard L. Madoff Investment Securities LLC liquidation rejecting numerous attempts by his team at BakerHostetler to stretch the U.S. Bankruptcy Code in the name of bringing Ponzi scheme proceeds back to the estate.

Attorneys say the tenor of the case has shifted markedly as the federal court in the Southern District of New York has taken on a greater share of the decisions, as district court judges cast an increasingly skeptical eye on Picard’s recovery efforts. Defendants who resisted the impulse to settle early on — largely BLMIS investors who took home Ponzi scheme proceeds and banks accused of facilitating the fraud — are now arguably in a stronger position than ever.

“There’s been almost zero good news for the trustee and, in my view, the settlement success is coming to an end,” Jonathan Sablone of Nixon Peabody LLP said. “The settlements will begin to dry up, and [among] the cases that are pending, the ones that settle will settle for a lot less than they might have before all these decisions came down.”

A string of decisions against Picard began in May, when U.S. District Judge Jed S. Rakoff handed down a defendant-friendly ruling on good faith. In June, the U.S. Supreme Court slammed the door on common law claims against several global banks, and a week later, Judge Rakoff held that transfers between foreign BLMIS feeder funds and their institutional backers overseas could not be clawed back, a significant hindrance to any recovery from European institutional investors.

Then this month, the Second Circuit refused Picard’s attempt to derail two investor settlements totaling $490 million with BLMIS feeder fund manager J. Ezra Merkin, who has been a primary target throughout the liquidation. A day later, U.S. Bankruptcy Judge Stuart M. Bernstein gutted the trustee’s $564 million adversary suit against Merkin.

Together, the rulings mark a departure from the early bankruptcy court proceedings where the trustee seemed to always get his way, according to Jerome Reisman of Reisman Peirez Reisman & Capobianco LLP.

After the Ponzi scheme collapsed, Picard put together a litigation program that focused on solvent entities and individuals and began extracting big-dollar settlements, especially in the first two years of the liquidation. Under rigid settlement protocols, any settling defendant had to satisfy a high percentage of the trustee’s claim, and those thresholds climbed higher as he racked up more and more deals.

“People were intimidated, they were scared, there was so much adverse publicity and the trustee was trying to link so many defendants to Madoff as being somehow complicit,” said Reisman, who has worked on cases in the liquidation. “A lot of the defendants just wanted to get out of there.”

The success of the recovery effort took everyone by surprise and created a lucrative secondary market for the Securities Investor Protection Act claims it generated. Driving the settlements, in large part, was uncertainty over the limits courts would set on recovering tainted money, coupled with the unprecedented scope of the fraud itself.

“Once Picard could legitimately say that [he’s] collected hundreds of millions of dollars in settlements, some of the holdouts began to think to themselves that there’s got to be something there,” Sablone said. “It’s settlement psychology.”

But when cases began moving out of bankruptcy court, the federal judges in the Southern District of New York pushed back and criticized Picard’s aggressive recovery and clawback theories. And more of the court battles shifted from smaller targets to deep-pocketed global banks that had the means and incentive to resist Picard’s claims.

At the same time, the trustee stalled on the international front. Cayman Islands and British Virgin Islands courts have been reticent to let him step into the shoes of foreign feeder funds, and European courts have proven unreceptive to his efforts to get at the ultimate beneficial interests in those funds. Last month, a U.K. court soundly rejected a suit by British BLMIS liquidators alleging Madoff’s Austrian associate Sonja Kohn and his sons Andrew and Mark knew of the fraud.

Of course, Picard still has other avenues available. He’s still filing clawback suits against so-called net winners, those who took out more from Madoff’s scheme than they originally invested. The suits could get a boost if the Second Circuit rules that he can look back six years, as opposed to two, to determine who qualifies, Michael I. Goldberg of Akerman LLP said. The Merkin ruling and Judge Rakoff’s decision on foreign transfers could also be vulnerable on appeal, and one reversal would swing the momentum back in the trustee’s favor.

“Certainly these decisions have been setbacks for Picard, but he’s not dead in the water,” Goldberg said.

But for now, the defendants’ winning streak has given them momentum and leverage.

“You have had a series of institutions that have been willing to go the distance in court, and the longer they’ve gone, the better result they’ve gotten,” Sablone said.