Bernard Madoff Bankruptcy Investor Action

In Rosenman Family, LLC v. Picard, No. 09-5296-bk, 2010 WL 3911370 (2d Cir.), on October 7, 2010, the U.S. Court of Appeals for the Second Circuit affirmed the U.S. Bankruptcy Court for the Southern District of New York’s dismissal of a complaint brought by Rosenman Family, LLC, an investor with Bernard L. Madoff Investment Securities LLC (BLMIS), against Irving Picard, the trustee of BLMIS’s bankruptcy estate.

According to Bloomberg on January 3, 2009 in “Madoff Accepted $10 Million Six Days Before Arrest, Suit Says”, Bernard Madoff allegedly took $10 million from Rosenman Family, LLC, an ice delivery business that evolved into a coal supplier. The Rosenman lawsuit alleged Rosenman was entitled to a return of $10 million wired to BLMIS. BLMIS allegedly embezzled the funds so the moeny were not BLMIS’s property or part of BLMIS’s bankruptcy estate.

The bankruptcy court heard facts that Rosenman was a “customer” under the Securities Investor Protection Act (SIPA). The SIPA provides insurance for investors from broker-dealer wrongdoings, but not market risks. The New York bankruptcy court decided by depositing money with BLMIS to buy securities, Rosenman invoked SIPA. The bankruptcy court ruled Rosenman’s $10 million was part of the estate.

The Second Circuit affirmed the New York bankruptcy court’s decision that the $10 million were bankruptcy estate property. Rosenman called Madoff expressing interest in investing in the BLMIS fund, wired money according to a phone call, confirmed the BLMIS securities purchase, and did not object to the trade. There was no stealing because Rosenman willingly transferred money to BLMIS. Thus the funds became part of the estate.

People might think only those who spend too much get into financial trouble and bankruptcy, but many times it is not those who do not know how to save that get into debt. Poor investments and trusting the wrong professionals lead into financial betrayal. The Bernard Madoff bankruptcy teaches investors to research investment companies and professionals prior to working with them. Some of the most educated people and money makers were scammed by Madoff. It was probably more a matter of trust than lack of education that got them in trouble. Even though Madoff is locked in prison now, there are still Madoffs out there in every day life who work for their own interests. People who make money may be too busy making money, but even when someone passes on investing responsibility, keep an eye on due diligence for professionals who do not leave trust on the table.