Corporate & Securities Law

By Jim Hamilton

Madoff Investor Was SIPA Customer despite Delay in Purported Trading

An investor who wired $10 million to the Madoff securities firm six days before Madoff was arrested for securities fraud was a customer of the firm within the meaning of the Securities Investor Protection Act even though the fund was closed until the New Year and no trade ever took place. A federal bankruptcy judge ruled that the funds were wired and held in the Madoff firm?s account for the purpose of investing when the funds reopened. Regardless of whether the funds were to be invested immediately or upon the investor?s authorization, reasoned the court, the fact remained that the sole purpose of wiring the funds to the firm?s account was to effectuate future securities transactions. The customer relinquished all control over the funds once the wire was processed. The investor did not allege that the wired funds were to be escrowed or in any way segregated from other customer funds. The investment needed to establish customer status under SIPA was triggered at the moment the funds were deposited in the firm?s account. (SIPC v. Bernard L. Madoff Investment Securities LLC, US Bankruptcy Court, SD NY, No. 08-01789 (BRL), Feb 24, 2009).

It followed that the funds deposited in the Madoff firm?s account constituted customer property within the meaning of SIPA. Thus, they must be allocated in accordance with the Act?s provisions and cannot be returned to the investor. The trustee is expressly directed by SIPA to distribute customer property pro rata among claimants who qualify as customers, noted the court, and any contrary distribution of the funds would preclude the trustee from exercising his statutorily mandated duties and run afoul of SIPA?s clear command.

The court rejected the investor?s attempt to compare the circumstances surrounding the allegations to a thief who breaks into an individual?s home and steals money. Unlike a victim of theft, said the court, the investor voluntarily entrusted funds to the Madoff firm for the purpose of purchasing securities through that firm.

Full post as published by Jim Hamilton's World of Securities Regulation on March 02, 2009 (boomark / email).