Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Tuesday, August 16, 2011

Second Circuit Agrees with Madoff Trustee on Limiting Recovery of Net Winners

The Second Circuit today affirmed the order of the bankruptcy court in the Madoff liquidation proceeding, which in turn affirmed the decision of the the Trustee, Irving Picard, that investors' "net equity" should be calculated based on the Net Investment Method (amount of cash deposited in account less any withdrawals)and not the Last Statement Method (market value of securities reflected on last customer statement) as a number of "net winners" had argued.

The Court noted that, although both the Trustee and objecting claimants had argued that the plain meaning of the statutory definition supported their position, in fact the statutory language did not prescribe a single means of calculating "net equity" that would apply under all circumstances.  Instead, different fact patterns would call for differing approaches to determine the fairest method of calculating "net equity."  Under the circumstances of this case (i.e. the entirely fictitious nature of Madoff's account statements), the Trustee's approach, approved by SIPC and the SEC, was consistent with the purpose and design of SIPA.  Moreover,

use of the Last Statement Method in this case would have the absurd effect of treating fictitious and arbitrarily assigned paper profits as real and would give legal effect to Madoff's machinations.

In re Bernard L. Madoff Inv. Sec. LLC (2d Cir. Aug. 16, 2011)Download InreMadoff10-2378_opn

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