Madoff Drama Moves Into NY Bankruptcy Court
An informal creditors or investors committee could be formed within the next week.
December 17, 2008
Some of the massive fraud case involving Bernard Madoff will now play out in a New York bankruptcy court in lower Manhattan, where it will be overseen by the judge managing Lehman Brothers’ behemoth bankruptcy, James Peck.
The Madoff liquidation of assets may involve a creditor's or investors committee despite the fact that the case is a SIPC, or Securities Investor Protection Corp., proceeding, according to one bankruptcy professional who has represented creditors in several notable bankruptcies brought about by fraud and corporate malfeasance.
An informal creditors or investors committee could be formed within the next week. A formal committee representing creditors and investors can only be created after a formal meeting of creditors in bankruptcy court.
The case is being handled as if it were a Chapter 7 bankruptcy filing because Securities Investor Protection Act provides that a liquidation of a failed securites business will be conducted as if it were a Chapter 7 case.
Bernard Madoff Securities manager and co-founder, Bernard Madoff, was allegedly at the center of a massive fraud that netted investors from New York to Los Angeles to Palm Beach and several European and Asian capitals. The fraud is estimated to be in the tens of billions of dollars, according to published reports. Not only has the fraud affected wealthy individuals it has also hurt several European and Asian banks.
On Monday, SIPC announced it is liquidating Bernard Madoff Investment Securities. The US District Court for the Southern District of New York granted the application and appointed Irving Picard as trustee for the liquidation of the brokerage firm, and further appointed the law firm of Baker & Hostetler LLP as counsel to Picard.
The case in New York’s Southern District court was filed on Dec. 11 and a creditors meeting has not yet been scheduled. However, one bankruptcy expert believes a creditors or investors committee may have to be formed.
Luc Despins, head of the restructuring group at Paul, Hastings, Janofsky & Walker, says he has received calls from institutional and retail creditors and investors who want a committee to be formed. Despins was counsel for creditor committees in the Enron, Refco, as well as Lehman Brothers bankruptcy cases. The creditors and investors that have reached out to him are US and European based firms.
Despins has suggested to his clients that a creditors or investors committee may be the best way to have some control. “Given magnitude of the case would it not be efficient to have a creditors committee?” Despins said, adding that Madoff should be in an insolvency proceeding himself.
Despins noted, though, that under Chapter 7 rules there is no express provision for compensation of professionals hired by the creditor’s committee, an issue that needs to be worked out. Such a creditors committee would have no fewer than three creditors and no more than 11.
“It is something people are talking about,” Despins says of the creation of a creditors committee, adding “it is too early to tell how much money is recoverable” for creditors or investors.
In the case of a Ponzi scheme such as the one that is alleged to have occurred at Madoff Securities, some investors may have to return money to the estate if they were paid out by the money management firm at a time when it was engaged in fraud. In New York, the statute of limitations is six years for what is known as fraudulent conveyance.
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