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Second Circuit Affirms Protection of the Section 546(e) Safe-Harbor Shield for Certain Madoff Investors
The answer is no. Irving H. Picard, the trustee (the Trustee) for Bernard L. Madoff Investment Securities LLC (BLMIS), appointed pursuant to the Securities Investor Protection Act (SIPA), may not clawback money paid out by BLMIS to hundreds of its customers. This was the recent decision reached by the United States Court of Appeals for the Second Circuit in Picard v. Ida Fishman Revocable Trust (In re Bernard L. Madoff Investment Seurities LLC), 773 F.3d 411 (2d Cir. 2014), and the decision continues the recent trend of extending the reach of Bankruptcy Code section 546(e)'s safe harbor protections. But, why not? Potentially hundreds of millions of dollars could be recovered and then paid out ratably to all BLMIS customers? Simply put, a SIPA trustee can only avoid and recover transferred funds that are voidable under the Bankruptcy Code, and section 546(e) provides an important exception to a trustee's clawback powers, which was triggered in this case. This article explores the arguments advanced in support of, and in opposition to, avoiding the payments made by BLMIS to its customers.
The Relevant Madoff Facts
We know the general story, but here are some of the key facts underlying this latest Madoff decision. When investors wanted to open accounts with BLMIS, they were required to execute the following three documents: 1) a “Customer Agreement,” which authorized BLMIS to open or maintain an account for the customer's benefit; 2) a “Trading Authorization,” pursuant to which each customer appointed BLMIS to be the customer's agent, and to, among other things, buy, sell and trade in any securities; and 3) an “Option Agreement” (together with the Customer Agreement and the Trading Authorization, the “Account Documents”) pursuant to which each customer authorized BLMIS to engage in options trading for the customer's account. Unfortunately, BLMIS did not conduct any actual securities or options trading. Instead, customer investments were deposited into a single commingled account, and BLMIS prepared customer statements to evidence fictitious securities trading activity. When customers wanted to withdraw their funds, BLMIS simply sent them cash from the commingled account.
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