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Court Dismisses Madoff Trustee’s $100 Million Clawback Claim

October 27, 2024
Business Litigation Reports

Quinn Emanuel recently obtained a dismissal for our client, a sovereign wealth fund, of the Bernard Madoff Trustee’s effort to claw back a distribution of $100,000,000 that the client had received.  The claim relates to the infamous Madoff Ponzi scheme, the largest, and perhaps most litigious, Ponzi scheme in history with hundreds of cases for billions of dollars still ongoing more than 15 years after the disclosure of the Madoff fraud.    

            In the early 2000s, investors were clamoring to invest with Bernie Madoff’s Investment Securities firm, which reported outsized gains year after year regardless of overall market performance.   Offshore “feeder funds” were formed to take those investments and then invest substantially all of their assets with the Madoff investment fund.  Many sophisticated investors all over the world, such as our client, invested in Fairfield Sentry, the largest of the Madoff feeder funds.  In 2005, as part of its normal asset reallocation practice, the client withdrew $200 million and, in 2006, it withdrew another $100 million.  The client had significant “gains” on those investments but had no idea that those gains were actually the result of Madoff’s Ponzi scheme.   No one had any idea that fraud was occurring until the financial crisis of 2008, when Madoff confessed to his two sons who then turned him in to the FBI.  The disclosure of the fraud led to insolvency proceedings for the Madoff fund in New York and for Fairfield in the British Virgin Islands.

            Along with hundreds of other sophisticated investors who had redeemed Fairfield investments in the normal course, our client was sued by the Fairfield Liquidators in 2010 and the Madoff Trustee in 2011, each seeking recovery of the $300 million our client had invested in and redeemed from Fairfield.  Quinn Emanuel was hired to defend these claims.  We succeeded along with our co-Defendants in having the Bankruptcy Court dismiss the Liquidators’ claims.  That dismissal is currently on appeal with the Second Circuit.  Together with members of a defense group, we also obtained a dismissal in the Madoff case until the Second Circuit reversed dismissal of these cases in 2021.  The Trustee then filed an amended complaint against our client, and we moved to dismiss on a number of grounds, including sovereign immunity.  The bankruptcy court denied every motion to dismiss filed by the hundreds of Defendants, including our client.

            We appealed to the District Court on the unique issue of sovereign immunity.   The bankruptcy court had found that the commercial activity exception applied because the impact of the redemption request was felt in New York at Madoff’s fund.  On appeal, Judge Andrew Carter disagreed and found that a redemption request made by a foreign sovereign to a fund located in the BVI does not cause commercial activity in the US.  But since the foreign sovereign had directed that Fairfield send the 2005 redemption to a bank account in New York, Judge Carter found that that action was sufficient for the commercial activity exception to sovereign immunity.  But the Trustee made no allegations about where the 2006 $100 million was directed.  In his initial decision, Judge Carter reversed the bankruptcy court but remanded for the Trustee to take discovery as to where the $100 million withdrawal was directed.  We sought reconsideration on this last point, contending the Trustee had waived its right to take jurisdictional discovery.  Judge Carter agreed.  He directed the bankruptcy court to dismiss this claim.  The Trustee did not appeal, and the bankruptcy court subsequently entered an order terminating the claim for $100 million.         

            The Quinn Emanuel team, consisting primarily of three attorneys, outlawyered a large team from the Trustee that had been working on these cases non-stop for more than 15 years and who the courts view as the “good guys.”