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Bankruptcy Court Negates Madoff Trustee’s $220m Clawback Action For Lack of Investor’s Actual Knowledge of Fraud

March 14, 2016, New York – On March 14, 2016, Judge Stuart Bernstein of the U.S. Bankruptcy Court dealt a severe blow to the efforts of Trustee Irving Picard to clawback over $220 million in transfers from Bernard L. Madoff Investment Securities (BLMIS) to investment vehicles that profited from Bernie Madoff’s Ponzi scheme.

Judge Bernstein dismissed most of the claims brought by the Trustee against Legacy Capital Ltd, a British Virgin Islands-based investment vehicle and Khronos LLC, a provider of accounting and other services to Legacy. The Trustee’s complaint sought to avoid and recover approximately $213 million in initial transfers made to Legacy and approximately $6.6 million in subsequent transfers made to Khronos.

The Trustee alleged eight counts under federal and New York State law. Counts one and two alleged actual and constructive fraud and sought to recover from Legacy transfers made within two years of the Madoff bankruptcy pursuant to Section 548 of the Bankruptcy Code. Counts three to six sought to recover from Legacy transfers made within six years of the Madoff bankruptcy for alleged actual and constructive fraudulent transfer under New York Law. Count seven sought to recover from Legacy transfers as undiscovered fraudulent transfers under New York law regardless of when they occurred. Count eight sought to recover from Khronos subsequent transfers from Legacy under Section 550 of the Bankruptcy code.

Legacy moved to dismiss the complaint alleging that the Trustee’s claims were barred by the safe harbor of Bankruptcy Code § 546(e). Khronos moved to dismiss count eight, arguing that the Trustee had failed to plead actual knowledge. The Court granted Khronos’ motion to dismiss the Trustee’s complaint in its entirety, and also granted Legacy’s motion to dismiss except to part of the first count of the Trustee’s complaint, which sought to recover fictitious profits transferred to Legacy within two years of the BLMIS bankruptcy filing date.

The case is In re: Bernard L. Madoff Investment Securities, Irving H. Picard, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC v. Legacy Capital Ltd., No 08-99000, Adv. Proc. No. 08-01789; Adv. P. No. 10-05286.


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