New York Attorney General Eric Schneiderman accused the Bernard Madoff brokerage trustee of trying to intimidate the state’s top law enforcers in a bid to overturn a $410 million settlement with a former Ponzi-scheme investor.
Schneiderman on Aug. 31 asked a district judge to take over the case so he could complete the settlement of a state lawsuit against J. Ezra Merkin, who allegedly diverted customer funds to Madoff. Trustee Irving Picard has asked a bankruptcy judge to block the deal, saying it obstructs his own efforts to collect $500 million from Merkin and his funds for a different group of Madoff investors.
Picard is interfering with the attorney general’s power to enforce New York’s Martin Act and other legal rights of the people of the state, Schneiderman said in a filing in federal court in Manhattan. Since 2009, Picard has “made intermittent efforts to intimidate” New York’s attorneys general, threatening to sue to make them turn over any funds taken from Merkin, Schneiderman said.
“There is no basis in law, fact, or equity for the trustee’s claims,” Schneiderman said. Removing the case from bankruptcy court “will promote judicial efficiency and avoid further delay in making distributions from the Merkin defendants’ assets” to hundreds of investors who otherwise would get nothing from Madoff’s estate, he said.
Late last year, a Picard lawyer called the attorney general’s office, saying he had heard a settlement was close, Schneiderman said. Picard’s lawyer said the trustee would sue to stop the deal “if the NYAG did not agree within 48 hours that the bankruptcy court would have exclusive jurisdiction over any disputes between the trustee and the NYAG,” according to the filing.
The attorney general rejected the demand, offering a meeting that the lawyer said he would set up, and didn’t, Schneiderman said.
Under the deal, Merkin and his funds would pay $405 million to compensate customers, and $5 million to New York State. Schneiderman and his predecessor, Andrew Cuomo, used state law including the Martin Act in their pursuit of Merkin for allegedly fraudulent conduct, and weren’t interfering with separate claims pursued by Picard, according to the filing.
Amanda Remus, a Picard spokeswoman, didn’t immediately respond to an e-mail seeking comment on the filing.
Picard has said that under bankruptcy law he has the sole right as trustee to sue former Madoff investors who allegedly participated in the con man’s fraud, and to use the proceeds to pay customers whose claims he has authorized. Schneiderman and Cuomo were acting for Merkin customers who don’t have approved claims to money raised by Picard, Schneiderman said.
According to Picard, $200 million of Merkin’s settlement money is already sitting in an escrow account with Bank of New York Mellon Corp., awaiting completion of the deal with Schneiderman.
In January, Picard 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 picked a former judge, James L. Garrity Jr., as the mediator.
Asking Lifland to stop the Merkin deal last 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, Cuomo claimed Merkin and his funds secretly steered assets to Madoff and concealed Madoff’s role in the Ponzi scheme, harming investors. Cuomo, a Democrat, is now New York’s governor.
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 suit is Picard v. Schneiderman, 12-01778, U.S. Bankruptcy Court, Southern District of New York (Manhattan).