California Madoff Investor Suit Is Illegal, Picard Says

California Attorney General Kamala Harris is breaking the law by suing to recoup illegal profits from Bernard Madoff’s fraud in competition with the Madoff trustee, according to a court filing.

The trustee, Irving Picard, is trying to block Harris’s $270 million state enforcement action against investment adviser Stanley Chais’s estate, saying that under U.S. bankruptcy law the trustee alone can take money stolen from Madoff customers. Harris has said her suit is an exception to the rule, because she is exercising her policing power under state law.

Recent court rulings disprove that, Picard said in a filing in U.S. Bankruptcy Court in Manhattan. While her suit couldn’t be stopped if she was acting to preserve public safety or welfare, she is actually suing for money, and her suit is subject to bankruptcy rules, he said.

“When the focus of the third party action is not to prevent acts that threaten public safety and welfare but instead to obtain a pecuniary benefit for a private party, the automatic stay applies,” he said, referring to the bankruptcy judge’s power to stop lawsuits that interfere with the running of a case.

Shum Preston, a spokesman for Harris, didn’t immediately return a call seeking comment on Picard’s filing.

Photographer: Peter Foley/Bloomberg

Irving Picard, the trustee liquidating the firm of Bernard Madoff. Close

Irving Picard, the trustee liquidating the firm of Bernard Madoff.

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Photographer: Peter Foley/Bloomberg

Irving Picard, the trustee liquidating the firm of Bernard Madoff.

‘Investment Wizard’

Harris, a Democrat, wants to press a 2009 complaint in state court in Los Angeles that alleges Chais passed himself off as an “investment wizard” and earned $270 million in fees from 1995 to 2008 for “doing nothing more than funneling all of his investors’ capital into an epic Ponzi scheme” without their knowledge or authorization. She is seeking to recover illegal profits and other penalties.

Picard sued Harris Jan. 4 in U.S. Bankruptcy Court in Manhattan, alleging her lawsuit interferes with the collection of assets needed to help compensate Madoff victims.

The clash between federal and state powers in Picard’s suit against Harris might eventually go to the U.S. Supreme Court and make new law, said Michael Clark, a former federal prosecutor who has handled financial fraud cases.

U.S. law, which includes the bankruptcy code, is supreme, although it gives the federal government only limited authority, he said.

Legal Action

Answering Picard’s lawsuit against her, Harris said her legal action against Chais’s estate makes no attempt to recover money belonging to the Madoff brokerage trustee.

“While the trustee’s desire to maximize the amount of money available to the victims of Bernard Madoff is laudable, his attempt to interfere with the people’s action in order to achieve that goal finds no support in the Bankruptcy Code, and thus, must be rejected,” she said.

Picard sued Chais and related entities in 2009, demanding return of $1 billion allegedly withdrawn fraudulently from the Ponzi scheme. The money manager died in 2010.

Madoff, 72, is serving 150 years in prison after pleading guilty to orchestrating the fraud that destroyed his New York- based firm, which collapsed in December 2008. Picard and his law firm, Baker & Hostetler LLP, have charged about $273 million for liquidating the estate.

The bankruptcy court case is Picard v. Hall, 12-01001, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Linda Sandler in New York at lsandler@bloomberg.net

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net

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