No Interest, Inflation Adjustments For Victims of Bernard Madoff’s Scheme
Sept. 11 –The U.S. Bankruptcy Court for the Southern District of New York Sept. 10 ruled as a matter of apparent first impression that claims by victims of fraudster Bernard Madoff’s Ponzi scheme may not include interest, inflation adjustments or other “time-based damages” (Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC , 2013 BL 241099, Bankr. S.D.N.Y., Adv. Pro. No. 08-01789 (BRL), 9/10/13).
Judge Burton Lifland said that the language and framework of the Securities Investor Protection Act and other factors support trustee Irving Picard’s unadjusted net investment method for determining the net equity claims of Bernard L. Madoff Investment Securities LLC’ customers. Under this method net equity claims of BLMIS customers would be calculated based upon the monies that the customers deposited in their BLMIS accounts, less any amounts they withdrew.
The court said that choosing any method for calculating net equity is especially challenging given the complex and unique facts of Madoff’s scheme. This ruling provides a distribution formula that impacts not only the extent of the entitlements of each BLMIS claimholder to the limited customer property fund and when the $1.4 billion cash reserve will be released.
The court said that in this SIPA liquidation of BLMIS, the trustee is directed to recover and distribute customer property to BLMIS’s customers, evaluate claims and liquidate any other assets of the firm to benefit of the estate and creditors.
The court said that certain objecting claimants, consisting of both individuals who withdrew more than they deposited with BLMIS–net winners–as well as ones who withdrew less–net losers–seek time-based damages for the period of time during which their funds were deposited with BLMIS.
Specifically, the court said, certain objecting claimants seek interest-based adjustments to their net equity claim based on claims against BLMIS for federal securities fraud which entitle them to prejudgment interest; state law claims against BLMIS for conversion, which entitle them to prejudgment interest of 9 percent under New York law, and general claims for lost investment opportunities over time. Others, the court said, seek inflation-based adjustments to their net equity claims in reliance on the precept that the value of the dollar changes over time.
Meanwhile, the court said, the Securities and Exchange Commission submitted a brief supporting application of “constant dollars.” . This concept refers to dollar values after adjustment for inflation, the court said. In this regard, the court said that the SEC seems to have retreated from an earlier position, and now maintains that the net equity calculus should include a constant dollar adjustment, but leaving to the court’s discretion whether to include constant dollars.
This position is not entitled to deference under either Chevron or Skidmore, the court said (Chevron U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (1984); Skidmore v. Swift & Co., 323 U.S. 134 (1944).
Turning to the merits, the court ruled that the plain language of SIPA supports upholding the trustee’s unadjusted net investment method. In particular, the court said that the statutory definition of net equity, SIPA §78lll(11), lacks language supporting the inclusion of interest, inflation or other time-based damages. This statutory silence, the court said, supports an inference that Congress did not intend to award time-based damages for two reasons. First, Congress knows how to include interest or inflation adjustments when they are intended. Next, the court said, when Congress includes time-based adjustments in SIPA, it has accomplished them with a high level of specificity.
In other specifics, the court said that the inclusion of time-based damages would eliminate the market risks that are inherent in securities and additional market-based investment vehicles. This would result in an outcome that the objecting claimants never bargained for and SIPA never intended to protect, the court said.
In sum, the court upheld the trustee’s determination that net equity should be based on the trustee’s net investment method, without any adjustments or enhancements for time-based damages.