Madoff trustee asks Supreme Court to reverse appeals ruling, saying $4B in payouts jeopardized

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NEW YORK — The trustee finding money for victims of Bernard Madoff's epic fraud asked the U.S. Supreme Court on Tuesday to overturn a court ruling that he says may prevent the recovery of nearly $4 billion, reward those who unwittingly profited from the Ponzi scheme at the expense of those who did not, and have far-reaching effects for future victims of financial frauds.

Lawyers for the trustee, Irving Picard, asked the high court to look at the December ruling by the 2nd U.S. Circuit Court of Appeals in Manhattan, saying the case raises novel questions for the Supreme Court and threatens a century's worth of law that steered how courts respond to the legal aftermath of Ponzi schemes.

"Denying review would only perpetuate confusion and uncertainty at a time when investors can afford neither," the legal papers said, adding that the 2008 financial crisis revealed that investors are victims of a remarkable number of financial frauds.

The lawyers argued that the 2nd Circuit ruling guts Picard's authority at a time when trustees increasingly rely on so-called clawbacks to recover money from those who profited from illegal schemes and redistribute money to those who did not.

The court papers said the appeals court decision had an "absurd result," extending a "stockbroker defense" designed by Congress as a narrow exception to the clawback authority. They said the exception was created to prevent potential market instability that might result if a trustee unwound large numbers of actual securities trades by the debtor, possibly causing the insolvency of one market participant "to spread like a contagion throughout the market."

But Picard's lawyers said Congress did not intend for the stockbroker defense to extend to someone like Madoff, who cheated thousands of people over several decades by failing to invest their $19.5 billion at all, instead redistributing the money whenever an investor requested a payout. Madoff, 76, is serving a 150-year prison sentence after revealing the fraud in December 2008.

Picard has so far recovered $10.5 billion for investors, largely through deals reached with some of the thousands of investors who received more money from Madoff than they had invested. That money is not threatened by the 2nd Circuit decision.

The court papers said the 2nd Circuit ruling permits those who received false profits from the fraud to keep their gains and treats Madoff's fraudulent securities trading scheme as if it was genuine, threatening the recovery of $2 billion and calling into question another $2 billion in potential recoveries and distributions.

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