Madoff Trustee, California’s Harris to Hold Talks on Suit

California Attorney General Kamala Harris and the liquidator of Bernard Madoff’s defunct firm will hold talks seeking to end a deadlock over Harris’s $270 million lawsuit against an alleged beneficiary of the Ponzi scheme.

The two sides will use mediation to pursue a settlement, U.S. Bankruptcy Judge Burton Lifland said today at a hearing in Manhattan. Madoff trustee Irving Picard had asked Lifland to stop Harris’s suit against Stanley Chais’s estate, saying only the trustee can collect money for Madoff’s Ponzi victims. Harris contends her suit can proceed because she’s using her state policing power to protect consumers from fraud.

“One thing is clear: There are limited funds and multiple claimants,” Lifland said in court.

The combatants portray their fight in court filings as a clash between federal bankruptcy law, which describes a trustee’s powers in fraud cases, and state law, governing a state’s top law enforcer. In New York, Picard’s home state, he didn’t publicly protest in June when Attorney General Eric Schneiderman struck a $410 million settlement with Madoff feeder fund operator Ezra Merkin.

“Going to war with the attorney general in New York, who is a large influential figure in his own circles, is much more difficult than fighting someone in another state,” said bankruptcy lawyer Chip Bowles of Bingham Greenebaum Doll LLP in Louisville, Kentucky. “That’s just reality. Given his business dealings, the trustee may need Schneiderman more than he would ever need Harris.”

‘Investment Wizard’

Picard declined to explain why he sued Harris and not Schneiderman. “We don’t talk publicly about our strategy,” he said in an interview.

Shum Preston, a spokesman for Harris, said he couldn’t immediately comment.

Harris, a Democrat, has sought 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Picard’s 2009 suit against Chais and related entities demanded $1 billion allegedly withdrawn fraudulently from the Ponzi scheme. The Beverly Hills, California-based money manager died in 2010. Picard sued Harris in January, alleging her lawsuit interferes with the collection of assets needed to help compensate Madoff victims.

‘Select Group’

Earlier this month, Picard said if Harris is allowed to recoup illegal profits from the Madoff Ponzi scheme, any funds recovered would go either to California’s coffers or to “a select group” of investors who are residents of the most populous state. Yet Schneiderman’s Merkin deal, settling a lawsuit alleging the investor secretly placed client money with the con man, calls for using $405 million to compensate investors.

While Picard acknowledges that state policing powers are exempt from bankruptcy rules, he said last month in a court filing that Harris’s suit isn’t exempt because she’s suing someone who is dead and can’t be deterred from wrongdoing.

Harris’s suit is meant to deter all “bad actors,” she said, in answer to Picard.

‘Bad Actors’

“Law enforcement actions are concerned with not only stopping or deterring the illegal conduct of a particular defendant, but of all other possible future bad actors,” Harris said in a filing. “By punishing violations of the law and making them ‘unprofitable,’ enforcement actions affect deterrence broadly.”

Picard so far has managed to stop most suits in the Madoff case filed by private investors to recover money they lost. The trustee contends that only he has a right to take back allegedly illegal profits from the Ponzi scheme and distribute them to investors whose claims he has decided are valid.

Last month, Lifland blocked a Florida class-action lawsuit against the estate of Jeffry Picower, one of Madoff’s largest former investors, saying it violated the law.

“This court has sole jurisdiction over the administration and distribution of estate assets to customers,” he said. The investors appealed his ruling.

Picard settled a lawsuit against the Picower estate for $7.2 billion in 2010 after alleging the investor knew of, and profited from, the fraud. Madoff customers who have little prospect of getting paid by Picard say he is interfering with their rights.

150-Year Sentence

Madoff is serving a 150-year sentence after pleading guilty to a fraud that wiped out $17 billion of customers’ principal. Picard and his law firm, Baker & Hostetler LLP, have charged $273 million for liquidating the estate since Madoff’s 2008 arrest, while returning $330 million to customers.

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