A US appeals court said that Citigroup must face a lawsuit over Bernie Madoff’s Ponzi scheme that seeks to recover $343m the bank allegedly received after it became aware the funds might have suspicious origins.
The appellate ruling resurrected a lawsuit by Irving Picard, the trustee tasked with recovering money for Ponzi scheme victims, alleging that Citi accepted money from Madoff’s phantom investment firm despite knowing facts suggesting it was engaged in fraudulent activity.
Picard’s case against Citi was dismissed by the bankruptcy court overseeing his liquidation of Bernard L. Madoff Investment Securities and by the federal district court in New York, which found the trustee was required to prove that Citi lacked good faith by being “willfully blind” to “red flags” of fraudulent activity.
The Second Circuit Court of Appeals ruled on 30 August that wasn’t the correct standard, and that Picard only had to demonstrate that Citi lacked good faith because it was aware of suspicious facts that would have led a reasonable person to investigate further.
Citi declined to comment on 31 August. Seanna R. Brown, a lawyer with Picard’s team, said the court ruling is an important victory for account holders of BLMIS who haven’t fully recovered their losses from the Ponzi scheme.
“The Second Circuit reaffirmed the longstanding principle that good faith is an affirmative defence that defendants have the burden to plead,” Brown said. “The decision preserves the trustee’s ability to pursue $3.75bn of stolen customer property currently in the hands of global financial institutions, hedge funds, and other participants in the global financial markets, such as the defendants at issue here.”
In addition to Citi, Picard also won a ruling from the appeals court allowing it to proceed with similar lawsuits against two other financial institutions that did business with Madoff, Legacy Capital and Khronos.
Picard has alleged that Citi was unable to verify that Madoff’s firm properly segregated its customer accounts, that it was conducting the options trades it claimed to be, or even that the assets existed in any account. A managing director at Citi conducted a separate investigation and concluded that Madoff’s purported “split strike conversion” strategy outperformed the market to a degree that appeared to be statistically impossible, according to Picard’s complaint.
Picard has alleged that Citi received the $343m in indirect transfers of Ponzi scheme proceeds when it was “willfully blind to circumstances suggesting a high probability of fraud.”
The trustee has recouped and distributed more than $14bn to account holders at BLMIS, close to 70% of their allowed claims.
Litigation seeking to recover more for account holders could go on years longer. Last year, the Supreme Court gave Picard the green light to pursue stolen cash that passed between foreign entities.
Madoff died in April in a prison medical center in North Carolina while serving a 150-year sentence.
Write to Alexander Gladstone at [email protected]
This article was published by Dow Jones Newsplus