ContractsProf Blog

Editor: Myanna Dellinger
University of South Dakota School of Law

Thursday, February 5, 2009

Madoff Mistake Case?

This story from the NY Times:

In June 2006, Steven Simkin and Laura Blank, who were in the process of a divorce, agreed to evenly split the $5.4 million in an account they had with Madoff Securities, according to a suit that Mr. Simkin filed Tuesday in State Supreme Court in Manhattan. Mr. Simkin gave Ms. Blank $2.7 million in cash, according to the suit, and held onto the account.

All this happened, of course, before federal authorities arrested Mr. Madoff in December on charges that he ran a Ponzi scheme that lost up to $50 billion. Mr. Simkin, much to his chagrin, would discover that his account was “worthless, literally not worth the paper on which the parties’ valuation rested,” the suit claimed, referring to the couple.

Now Mr. Simkin is suing Ms. Blank for the $2.7 million that he said he paid her.

“Steven, the bulk of whose liquid assets were invested with Madoff Securities, has been gravely damaged,” the lawsuit said. “It is only fair and equitable for Laura to shoulder her share of that harm.”

The couple was married for 30 years, separated in January 2002, and divorced in 2006, according to the suit.

During their divorce proceedings, the lawsuit said, Mr. Simkin and Ms. Blank struggled to value many of their assets — their Scarsdale home, his law partnership, her Manhattan apartment — but one of the values that came easily was that of their account with Mr. Madoff. They agreed to an equal split, the suit said. Because the account turned out to be valueless, the lawsuit said, the spirit of the agreement was broken.

“Allowing Laura to retain her asymmetrically large portion of the parties’ true assets would allow her to profit, at Steven’s expense, from Madoff’s fraud,” the suit said. “This is an inequitable benefit conferred on Laura by virtue of the parties’ joint mistake regarding the value of the Madoff account, and an inequitable harm to Steven.”

Ms. Blank did not return a telephone message seeking comment.

Mr. Simkin is a partner at the New York law firm of Paul, Weiss, Rifkind, Wharton & Garrison and chairman of the firm’s real estate department. He has represented lenders in several major real estate transactions.

So, it seems that there was a mutual mistake here: both parties thought the account was worth $5.4 million, but it was, in fact, worthless. However, did Simkin bear the risk of this mistake? Keeping the account entitled him to its (magical) rate of return, so does this mean he also risked any losses?

[Meredith R. Miller][H/T Alan Hornstein]

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I think the court should dismiss this case faster than the speed of light. The husband-plaintiff didn't make a mistake about the value of the investment. At the time of the agreement, the investment was worth $5 million. This is why he was able to withdraw the wife's share of $2.5 million. He chose not to withdraw his share of the investment. The fact that the value of the investment plummeted after her withdrawal is a matter of the market and timing. He can't have his cake and eat it too. If his $2.5 million doubled in a month, would he have given the wife an extra $1.75 million? Absolutely not. The husband is a sore loser and the law does not protect sore losers under these circumstances. Madoff harmed the husband; he should sue Madoff. Oh wait, he can't because Madoff doesn't have any money.

Sharmil McKee
Business Attorney
Philadelphia, PA

Posted by: Sharmil McKee | Feb 5, 2009 5:09:59 PM

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