Commercial Fraud Task Force Committee

ABI Committee News

District Court Reverses Good Faith Test in Bayou III

As a colleague characterized it, the U.S. Bankruptcy Court for the Southern District of New York in Bayou III,[1] set the high water mark for limiting the good-faith defense under § 548(c) in fraudulent transfer proceedings. That high water mark has now been reduced by a reversal by the U.S. District Court filed on Sept. 17, 2010, in a 90-page opinion (Bayou IV). Bayou III was a summary-judgment ruling, finding in favor of the trustee that certain redeeming investors were required to return payments for redemption of principal invested in the Bayou funds.

The courts ruled in both Bayou III and IV that the trustee had made a prima facie case for return of principal. The courts reasoned that because Bayou’s officers, Samuel Israel and Dan Mario, entered criminal guilty pleas admitting the Ponzi scheme, that such admissions constituted intent to hinder, delay and defraud because the redemption payments were necessarily part of the furtherance of the Ponzi scheme. This finding relegates defendants to their § 548(c) defense: They received the payments in good faith and gave reasonably equivalent value. As to principal redemptions, value is not an issue because antecedent consideration (their original investment) constitutes reasonably equivalent value. Thus, whether redemptions of principal must be paid back turns on the defense’s proof of good faith.

Read the full article.


An Update: Madoff Proceedings and Trustee's Suit Against the Fairfield Defendants

It has been nearly two years since Bernie Madoff was arrested in his Manhattan home and criminally charged with a multi-billion dollar securities fraud scheme operated through the investment advisory unit of Bernard L. Madoff Investment Securities LLC (BLMIS). Madoff spent decades building the world’s largest Ponzi scheme, so what has been going on since the appointment of Irving Picard as liquidating trustee in December 2008? As one could imagine, quite a lot. That being said, an attorney in Picard’s firm of Baker Hostetler recently noted that there are lawyers yet to be born who will work on the Madoff proceedings. Though much has transpired, it seems we may only be approaching mile marker one of a marathon.

Most activity is in the Second Circuit, where the appeal of Judge Burton R. Lifland’s March 1, 2010, opinion approving Picard’s “net-investment” method of determining customers’ claims in the SIPA liquidation proceedings is at issue.[1] Stay tuned, as the net equity issue has been extensively briefed by the trustee/SIPC and investors, along with several amicus briefs from the Securities and Exchange Commission (SEC) and nonprofit organizations.

Read the full article.


Petters Ponzi Case Clawback and Preference Lawsuits Filed

Two hundred fraudulent transfer and preference adversary proceedings have been filed in the In re Petters Company, Inc. et al. chapter 11 proceeding in the U.S. Bankruptcy Court in Minneapolis, Case No. 08-45257. One hundred twenty-six of these were filed by Lindquist & Vennum, principal counsel to the trustee, Douglas Kelley, primarily against hedge funds, individual and corporate investors, institutional investors and banks. Kelley's firm, Kelley, Wolter and Scott, has filed 54 suits, primarily against charitable entities and employees, seeking the return of bonuses, excess compensation and gifts. Fruth, Jamison and Elsass filed the balance of the claims primarily against strategic partners, investors and lenders. The total recovery sought exceeds $17 billion, including more than $1 billion in “false profits.” Thomas Petters was convicted on 20 counts and is serving a 50-year sentence. Five of Petters’ associates who plead guilty to various crimes were recently sentenced.


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