District Court Approves Trustee’s Use of Net Investment Method In Calculating Net Equity of the Customers in the Madoff Ponzi Scheme
April 15, 2022, New York – The District Court for the Southern District of New York has held in favor of a Trustee’s attempt to avoid and recover “approximately $16,880,000 that was transferred by BLMIS (Bernard L. Madoff Investment Securities LLC) to the entity defendants, Sage Associates and Sage Realty (“Sage Accounts”), in the two years prior to BLMIS’s filing for bankruptcy. The Sage family (owner of the Sage Accounts) had objected to “the Trustee’s use of the ‘Net Investment Method’ to calculate the value of their BLMIS accounts on the Filing Date.” Sages had contended that “because they directed or authorized Madoff to purchase the securities reported on their customer account statements… the Trustee is required to credit the securities reflected on the last customer account statements (‘Last Statement Method’) when calculating their net equity under SIPA § 78lll (11)”.
The Court found that “the transactions reflected on the Sages’ customer account statements were the product of Madoff’s after-the-fact fabrications, not the directions and authorizations of Malcolm Sage.” The Court cited the Second Circuit’s decisions in In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d 229, 233 (2d Cir. 2011) and In re New Times Sec. Servs., Inc., 371 F.3d 68 (2d Cir. 2004), while concluding that “the Trustee’s use of the Net Investment Method to calculate net equity in this case is consistent with the text and purpose of SIPA and the Second Circuit’s relevant decisions.” It also noted that doing otherwise “would have the absurd effect of treating fictitious and arbitrarily assigned paper profits as real” and “would diminish the amount of customer property available to former BLMIS customers who have yet to recover their principal investment.” The Court further concluded that “the Trustee has established a prima facie case under 11 U.S.C. § 548(a)(1)(A) and can avoid and recover the “fraudulent transfers” received by the Sages in the two years leading up to the Filing Date.