October 3, 2018, New York – Last year in August 2017, Irving H. Picard, the trustee for the liquidation trust of Bernard L. Madoff Investment Securities LLC (“BLMIS”) filed an amended complaint to recover avoidable transfers totaling approximately $156 million from the Defendants BNP Paribas S.A. and its affiliates. BNP Bank’s relationship with Madoff began around November 1988 when it provided a $15 million personal line of credit to Madoff, which increased to $40 million by May 1995, and to $75 million by October 1996. Madoff used the loan proceeds to finance and grow the BLMIS Ponzi scheme.
By way of background, Bernard Madoff operated the investment advisory arm of BLMIS as a Ponzi scheme. Madoff told investors that he employed the “split-strike conversion” strategy under which BLMIS purported to purchase a basket of stocks intended to track the S&P 100 Index, and hedged the investment by buying put options and selling call options on the S&P 100 Index. In reality, BLMIS never purchased any securities on behalf of its investors and sent monthly statements to investors containing falsified trades showing fictitious gains. All investor deposits were commingled in a JPMorgan Chase Bank account held by BLMIS, and the funds were used to satisfy withdrawals by other investors, benefit Madoff and his family personally, and prop up BLMIS’ proprietary trading department. The BLMIS Ponzi scheme collapsed when redemption requests overwhelmed the flow of new investments, and Madoff was arrested by federal agents for criminal violations of federal securities laws on December 11, 2008.
The Defendants moved to dismiss the trustee’s amended complaint arguing that it was improperly filed without leave of Court, the Court lacked personal jurisdiction over the Defendants, the complaint failed to state claims upon which relief can be granted, and that certain claims are time-barred.
The Court concluded that there was a personal jurisdiction because the banks’ employees comprised a group operating in New York and the subsequent transfers arose from the group’s New York contacts. Accordingly, the Court denied the Defendant’s motion to dismiss for lack of personal jurisdiction. Next, the Court held that the trustee’s red flag allegations did not support an inference that the banks subjectively believed there was a high probability that the firm was not trading securities; rather, it was likely that the firm’s principal fooled the banks as he did investors, financial institutions, and regulators. The Court stated that each of the subsequent transfers had to be judged separately to determine whether the banks gave value for purposes of their defense under Sec. 550 (b)(1). Thus, the Court concluded that the amended complaint failed to plead the Defendants’ bad faith and the Defendants were not at the center of a common scheme to strip assets from BLMIS, but instead were looking to payments from third parties. Accordingly, the Court held that the new subsequent transfer claims were time-barred, and it was futile to permit the Trustee to amend the Complaint to assert them.
Sec. Inv’r Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC (In re Madoff), Nos. 08-01789 (SMB), 12-01576 (SMB), 2018 Bankr. LEXIS 3073 (Bankr. S.D.N.Y. Oct. 3, 2018)