Koch Brothers Among Investors Who Can Keep Madoff BillionsBy
Madoff trustee sought to recoup $2 billion in dozens of suits
Bankruptcy judge sided with early Madoff investors in ruling
Billionaire brothers Charles and David Koch’s company fought for years to hold on to millions of dollars in profit from Bernard Madoff’s Ponzi scheme. That battle just paid off, and victims won’t like it.
Koch Industries and dozens of other former Madoff customers are poised to keep as much as $2 billion they gleaned from the con man’s bogus securities transactions after U.S. Bankruptcy Judge Stuart Bernstein in Manhattan ruled the cash is out of reach of a trustee recovering money for victims.
The ruling on Monday underscores that even eight years after the collapse of the biggest Ponzi scheme in U.S. history, the litigation stemming from the scam is still being defined by which Madoff customers profited at the expense of others. Many are still waiting for their principal.
Koch Industries and defendants in about 100 other suits argued the profit was beyond U.S. jurisdiction because it had been transferred -- usually from offshore feeder funds to foreign banks -- in the years before Madoff’s December 2008 arrest. Irving Picard, the lawyer who is liquidating the New York-based firm, contended the money could be clawed back because investors and feeder funds must have known they were subject to U.S. law. Bernstein disagreed.
While Picard has had mixed success in court, his combination of settlements and courtroom victories has raised almost $11.5 billion for victims, who lost $17.5 billion in principal. The litigation involving Koch and the other early Madoff investors relied on a legal defense known as extraterritoriality, and held the last large pot of cash that may have been available for victims.
Koch, an industrial conglomerate and one of the biggest private companies in the U.S., started investing with Madoff in the mid-1990s, according to court records. The company, run by the conservative-activist brothers who are worth a combined $102 billion, has refused Picard’s demands to return the money.
Picard sued Koch to recover $21.5 million that had been sent from Madoff’s firm in 2005 to a fund based in the British Virgin Islands, and then to a Koch entity in the U.K.
The defendants in the related cases initially claimed a victory in 2014 when U.S. District Judge Jed Rakoff said that money transferred overseas is generally out of Picard’s reach, but sent the case back to bankruptcy court for further arguments on how his ruling impacted the individual cases.
Monday’s decision dismisses almost all the claims and denies Picard’s request to amend them, said Franklin Velie, who represented the defendants in all the lawsuits.
“Foreign banks and service providers were dragged into the bankruptcy in the U.S. and claims were made against them for vast sums,” said Velie, with the law firm Sullivan & Worcester in New York. “We are hopeful this is the end of the matter.”
Picard didn’t accuse Koch and the other defendants of wrongdoing. As in his many prior suits to recover cash, the trustee argued the returns weren’t legitimate because Madoff used money from new investors to cover the fake profits of older ones.
Picard’s spokeswoman, Amanda Remus, said lawyers were reviewing the 87-page ruling and declined to immediately comment. Rob Carlton, a spokesman for the Kochs, declined to comment.
Most of the $2 billion affected by the ruling involves transfers from funds that were operated by Fairfield Greenwich Group -- by far the biggest feeder fund that channeled investors’ money to Bernard L. Madoff Investment Securities LLC, or BLMIS. In many cases, the money was transferred from one overseas account to another, putting it further out of Picard’s reach and complicating his litigation efforts.
Mark Cunha, a lawyer for Fairfield, didn’t immediately return a call seeking comment on the decision.
In 2003, Koch set up Koch Investment (U.K.) Co. to invest through a different fund that Fairfield created in the British Virgin Islands exclusively for foreigners -- Fairfield Sentry. Two years later Koch Industries withdrew the cash that’s now at the center of the trustee’s lawsuit.
Madoff is serving a 150-year sentence in a federal prison in North Carolina for running the Ponzi scheme.