Irving Picard
Irving Picard ()

Investors in “feeder funds” whose money was funneled into Bernard Madoff’s fraudulent securities firm may receive nearly $500 million to recoup part of their lost investments, a panel for the U.S. Court of Appeals for the Second Circuit ruled Friday.

The judges unanimously rejected an attempt by Irving Picard, trustee for the Liquidation of Bernard Madoff Investment Securities (BLMIS), to void settlements designed to return money to investors in Fairfield Greenwich Ltd. and in two funds operated by hedge fund manager J. Ezra Merkin, Ariel Fund Ltd., Ascot Fund Ltd. and Gabriel Capital LP.

The ruling affirmed judgments upholding the settlements by Southern District Judges Jed Rakoff (See Profile) and Victor Marrero (See Profile) in, respectively, Picard v. Schneiderman, 13-1785, and Picard v. Fairfield Greenwich, 13-1289.

Picard argued that the settlement funds are assets that should benefit the creditors and customers of the Madoff investment firm, not the “feeder funds.”

But the three-member panel—Judges Robert Sack (See Profile), Denny Chin (See Profile) and Christopher Droney (See Profile)—concluded that Picard failed to make valid arguments against the settlements on several grounds, including that they represent a fraudulent conveyance or fraudulent transfer whose purpose is to wrongfully reduce the pool or assets due creditors in a liquidation action.

Sack, writing for the panel, said the claims at issue involved investments to the feeder funds, not to wrongful transfers by BLMIS.

“In order to qualify as ‘disguised fraudulent transfer actions,’ therefore, the complaints against Fairfield and Merkin defendants would have to be contingent on Madoff or BLMIS’s wrongful transfer of the funds sought by the actions,” Sack said. “They are not.”

Instead, Sack said, the cases involved allegedly fraudulent conduct by Merkin and the managers of Fairfield Greenwich, who assured investors that they were carefully overseeing their investments while, in fact, they were doing little more than forwarding money to BLMIS.

The court said Picard, a partner at Baker & Hostetler, was also overstepping his authority as trustee by seeking to challenge the settlements between investors and Fairfield Greenwich and Merkin funds.

Creditors who have a claim for a “particularized” injury can sue to recover damages from third parties, but trustees cannot, Sack said, citing Hirsch v. Arthur Andersen & Co., 72 F.3d 1085 (2d Cir. 1995).

“The injuries alleged by the plaintiffs in both actions are alleged to have been caused directly by the non-debtor defendants—not by Madoff or BLMIS,” Sack wrote. “That renders them ‘particularized’ and outside the trustee’s purview.”

The court rejected Picard’s contention that he could block the settlements with a preliminary injunction by a showing they would have “immediate adverse economic consequences” for the BLMIS estate and cause it “irreparable harm.”

Sack noted that Picard is directly challenging the settlement in two actions in Southern District Bankruptcy Court, Picard v Merkin, Adv. Pro. No. 09-1182, and Picard v. Fairfield Sentry Ltd., Adv. Pro. 09-1239. Both actions have been pending for more than four years and favorable judgments for the trustee do not seem to be in sight.

“The district court reasonably found that it was not likely that the trustee would both prevail in his fraudulent conveyance actions and find himself unable to collect the resulting judgment as a result of the challenged settlements,” Sack wrote.

The settlement with Merkin will produce $405 million in compensation to investors over the next three years. In all, Merkin made about $2 billion worth of investments in BLMIS, according to court filings.

State Attorney General Eric Schneiderman, whose office pursued recoupment of the Merkin investments, said in a statement Friday that the ruling is a “victory for justice and accountability.”

Assistant Attorney General Brian Sutherland led a team of attorneys in Schneiderman’s office representing the state in the Merkin case.

Andrew Levander, a partner at Dechert, represented Merkin.

Marc Cunha, partner at Simpson Thatcher & Bartlett, represented Fairfield Greenwich.

Fairfield investors were represented by Stuart Singer, a Boies, Schiller & Flexner partner in Fort Lauderdale, Fla.

“The decision recognizes that the investors have separate claims from those of Irving Picard as trustee, and that the trustee cannot enjoin or stay such separate claims,” Singer said in a statement. “Therefore, this decision clears the way for a settlement to go into effect that will allow the members of the plaintiff class to begin recouping the enormous losses that they suffered.”

Baker & Hostetler partner David Sheehan represented Picard.

Picard and Sheehan were reviewing the ruling Friday, said Amanda Remus, spokeswoman for the trustee. She said the decision will not “impede” Picard from moving forward with his two claims for fraudulent conveyance in Bankruptcy Court.

Madoff is serving a 150-year sentence in prison for engineering the largest Ponzi scheme in U.S. history. Madoff’s fraud is believed to have resulted in investor loss of about $17.5 billion.