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California’s Harris Favors State, Madoff Trustee Says

California Attorney General Kamala Harris would wind up helping her home state or “a select group” of investors if she is allowed to recoup illegal profits from the Bernard Madoff Ponzi scheme, the liquidator of the con man’s brokerage said.

Trustee Irving Picard is trying to stop Harris’s suit, saying she is breaking the law by suing former investment adviser Stanley Chais’s estate to recoup $270 million in illegal profits. Harris, like New York Attorney General Eric Schneiderman in asserting a right to pursue local wrongdoing, has said her suit is legal because she is exercising her policing power under state law.

Under bankruptcy law, Harris’s suit might be barred if it had a monetary goal that conflicted with Picard’s effort to recoup money for people with claims he had validated. Harris has said she is using California’s consumer protection and securities laws to impose penalties that will deter other wrongdoers. Picard contends she has a hidden financial agenda.

“Her action serves no deterrent purpose and seeks to further private parties’ interests in obtaining a pecuniary advantage over BLMIS customers with valid claims to the estate,” he said in a July 3 filing in U.S. Bankruptcy Court in Manhattan, referring to Bernard L. Madoff Investment Securities LLC by its initials. It “will inure to the financial benefit of either the State of California or a select group of indirect investors in BLMIS through feeder funds operated by the Chais defendants.”

New York last month settled a $410 million lawsuit against J. Ezra Merkin over claims that Merkin funds secretly placed client money with Madoff. The agreement will help charities and other investors who entrusted Madoff with their savings, Schneiderman said. Massachusetts investors benefited in 2009 when that state’s Commonwealth Secretary William Galvin fined Fairfield Greenwich Advisors LLP $500,000 and made it return $7.5 million to Massachusetts investors.

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 Suit

Picard’s 2009 suit against Chais and related entities demanded $1 billion allegedly withdrawn fraudulently from the Ponzi scheme. The money manager died in 2010. 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.

Much of the $9 billion that Picard has raised from settlements has been tied up in court challenges and unavailable for distribution to customers who lost money.

Madoff, 72, is serving a 150-year prison term 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, while returning $333 million to customers.

The Harris case is Picard v. Hall, 12-01001, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The main case is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC, 08-ap-1789, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

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