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SEC, Justice seek to block plan to force Madoff bankruptcy

Agencies say that may limit victims' recovery of assets

Bloomberg News / April 9, 2009
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NEW YORK - The Securities and Exchange Commission and Justice Department told a federal judge that Bernard Madoff need not be forced into personal bankruptcy to ensure that all his assets are used to pay those he stole from.

The SEC yesterday opposed a request by victims of Madoff's Ponzi scheme to push him into bankruptcy, saying it would lead to wasteful litigation. The SEC said Madoff's assets, once recovered by the regulator and the Justice Department, will be distributed to victims and creditors. The victims fear that the assets won't be turned over to them, the agency said.

"The SEC can state unequivocally that it will cooperate fully with the DOJ and the Securities Investor Protection Corp. to ensure that any Madoff assets it recovers will be distributed to Madoff's victims and creditors," SEC attorney Alexander Vasilescu wrote in a brief filed in Manhattan federal court.

Lev Dassin, acting US attorney in Manhattan, said in a letter joining the SEC's opposition that the request was "premised on a fundamental misunderstanding of forfeiture and bankruptcy law." Forcing Madoff into personal bankruptcy could actually reduce the recovery for creditors, the letter said.

Creditors last week petitioned to put Madoff into bankruptcy. They included Blumenthal & Associates, with a claim of $30.2 million; Martin Rappaport, who claimed $20.8 million; and a trust bearing his name, which claimed an additional $8.3 million. A judge must approve their request before the victims may formally seek to force Madoff into bankruptcy.

"We're disappointed that the SEC is taking this position," said Jonathan Landers, a lawyer with Milberg LLP, which represents the petitioners. "The bankruptcy court has well-established mechanisms to gather and return assets. We're not confident that the SEC or the Justice Department can do as well."

The SEC said in its brief that a bankruptcy filing by Madoff in "this complicated fraud case" will likely lead to wasteful litigation involving the SEC, SIPC, and the Justice Department and isn't necessary because investors will get the assets anyway.

Under federal law, some of Madoff's possessions are subject to US forfeiture. Prosecutors have said the assets they seize from Madoff will be returned to victims.

Dassin's letter said the automatic stay under bankruptcy law, which blocks creditors from seizing assets outside of a bankruptcy proceeding, "does not affect criminal forfeiture proceedings, which may continue unabated."

Federal prosecutors have identified more than $100 million in real estate, cash, bonds, art, autos, boats, and other assets owned by Madoff and his wife, Ruth, which they said in March they intend to seize.

The SIPC, a government-backed corporation that covers losses when brokerages fail, is conducting a broad investigation of the assets of Madoff's New York-based firm, Bernard L. Madoff Investment Securities LLC. SIPC investigators so far have identified about $1 billion in assets, which will be used to compensate investors.