Aug. 17 (Bloomberg) -- New York Attorney General Eric Schneiderman will ask a district judge to decide whether the Bernard Madoff brokerage trustee can overturn a $410 million settlement with a former Ponzi scheme investor, the trustee said.
Schneiderman in June agreed to settle a state lawsuit against the investor, J. Ezra Merkin, who would pay $405 million to compensate the con man’s investors, and $5 million to the state. Bankruptcy trustee Irving Picard sued Schneiderman this month to stop him from completing the deal, saying it obstructs his own efforts to collect $500 million from Merkin and his funds for a different group of investors.
Now, lawyers for Schneiderman and the Merkin funds’ receivers have told Picard they want to have the case moved to district court from bankruptcy court, where Picard operates, the trustee said. They will seek a ruling on Picard’s suit against the state’s top law enforcement official, and his request for a preliminary injunction to stop the Merkin deal, Picard said in a filing yesterday in U.S. Bankruptcy Court in Manhattan.
“We believe this effort by Mr. Picard to prevent the attorney general from distributing $410 million to investors who were victimized by Mr. Merkin is inappropriate and without legal merit and we will continue to take all necessary steps to oppose it,” said James Freedland, a spokesman for the AG.
Picard said he hasn’t yet seen a copy of Schneiderman’s agreement with Merkin.
Schneiderman will file papers requesting the transfer of the case by Aug. 31 and the trustee will respond by Oct. 31, Picard said in the filing.
According to Picard, $200 million of Merkin’s settlement money is already sitting in an escrow account with BNY Mellon NA, awaiting completion of the deal with Schneiderman. The attorney general has told him that no other settlement-related transfers of assets have occurred since then, he said.
Picard has said that under bankruptcy law he has sole right as trustee to sue former Madoff investors who allegedly knew of the fraud, using the proceeds to pay customers whose claims he has authorized.
In January, he sued California Attorney General Kamala Harris, alleging her $270 million lawsuit against a former Madoff investor’s estate interfered with the collection of assets needed to help compensate Madoff victims, and would help only Californians.
U.S. Bankruptcy Judge Burton Lifland, who oversees the Madoff brokerage liquidation, told the two parties to go into mediation, and this month picked a former judge, James L. Garrity Jr., as the mediator.
Asking Lifland to stop the Merkin deal this month, Picard said, “If other attorneys general around the country could simply walk into state courts and secure settlements as the NYAG did, the BLMIS estate would be decimated, with residents of various states favored.”
Bernard L. Madoff Investment Securities LLC, or BLMIS, is the defunct Madoff firm.
Schneiderman’s move comes as district judges are reviewing hundreds of Picard’s lawsuits against companies and individuals to decide whether the trustee is using a valid interpretation of his powers under bankruptcy law, or his actions conflict with state and federal law. U.S. district judges Jed Rakoff and Colleen McMahon together knocked out $90 billion of Picard’s claims against banks including JPMorgan Chase & Co. and HSBC Holdings Plc.
In the Merkin lawsuit, Schneiderman’s predecessor, Andrew Cuomo, claimed Merkin and his funds secretly steered assets to Madoff and concealed Madoff’s role, harming investors.
Madoff is serving a 150-year sentence after pleading guilty to a fraud that wiped out $17 billion of customers’ principal. Picard has raised around $9 billion for customers, mostly from settlements, although some of it is still tied up in court challenges.
The case is Picard v. Schneiderman, 12-01778, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
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