As reported in The Wall Street Journal, Irving Picard, the SIPA Trustee charged with overseeing the liquidation of Bernard L. Madoff Investment Securities LLC, recently secured a significant victory from the Second Circuit Court of Appeals in Manhattan.
The ruling revives a previously dismissed $343 million adversary proceeding that the Trustee brought against a major U.S. bank, alleging that the bank accepted funds from Madoff's account holders despite internal suspicions that Mr. Madoff may have been engaging in financial fraud.
The Federal Court held that Mr. Picard was required to prove that the bank was "willfully blind" to the fraud. However, in a 3-0 decision, the Appeals Court ruled that willful blindness is not the correct standard under the plain meaning of good faith. Rather, the U.S. Bankruptcy Code only requires the Trustee to demonstrate "inquiry notice," meaning the bank was aware of suspicious facts that should have led a reasonable person to conduct further diligence. The ruling further held that the SIPA Trustee does not bear the burden of pleading the transferee's lack of good faith.
The decision also revived similar subsequent transferee litigations filed against two feeder funds, seeking a combined $219.8 million. The ruling directly impacts approximately 80 remaining litigations and could result in $3.8 billion in future recoveries that will directly benefit the victims of the largest Ponzi scheme in U.S. history.
The ruling directly impacts approximately 80 remaining litigations and could result in $3.8 billion in future recoveries that will directly benefit the victims of the largest Ponzi scheme in U.S. history.
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