SEC Seeks to Block Bid to Force Madoff Bankruptcy

The U.S. Securities and Exchange Commission told a federal judge that Bernard Madoff need not be forced into personal bankruptcy to ensure that all his assets are used to pay those he stole from.

The agency today opposed a request by victims of Madoff’s Ponzi scheme to push him into bankruptcy, saying it would lead to wasteful litigation. The SEC said Madoff’s assets, once recovered by the regulator and the Department of Justice, will be distributed to victims and creditors. The victims fear that the assets won’t be turned over to them, the agency said.

"The SEC can state unequivocally that it will cooperate fully with the DOJ and the Securities Investor Protection Corp. to ensure than any Madoff assets it recovers will be distributed to Madoff’s victims and creditors," SEC attorney Alexander Vasilescu wrote in a brief filed in Manhattan federal court.

Madoff pleaded guilty March 12 to defrauding investors by using money from new ones to pay off old ones in the largest Ponzi scheme in U.S. history. Before his Dec. 11 arrest, he told his thousands of clients that they had about $65 billion in accounts with him, prosecutors said.

Creditors last week petitioned to put Madoff into bankruptcy. They included Blumenthal & Associates, with a claim of $30.2 million; Martin Rappaport, who claimed $20.8 million; and a trust bearing his name, which claimed an additional $8.3 million. A judge must approve their request before the victims may formally seek to force Madoff into bankruptcy.

'Not Confident'

"We’re disappointed that the SEC is taking this position," said Jonathan Landers, a lawyer with Milberg LLP, which represents the petitioners. "The bankruptcy court has well-established mechanisms to gather and return assets. We’re not confident that the SEC or the Justice Department can do as well."

The SEC said in its brief that a bankruptcy filing by Madoff in "this complicated fraud case" will likely lead to wasteful litigation involving the SEC, SIPC and the Justice Department, and isn’t necessary because investors will get the assets anyway.

Under federal law, some of Madoff’s possessions are subject to U.S. forfeiture. U.S. prosecutors have said the assets they seize from Madoff will be returned to victims.

Federal prosecutors have identified more than $100 million in real estate, cash, bonds, art, autos, boats and other assets owned by Madoff and his wife Ruth, which they said in March they intend to seize. The couple’s Palm Beach, Florida, residence, a yacht called "Bull" and a smaller boat have been seized by the U.S. Marshals Service.

The SIPC, a government-backed corporation that covers losses when brokerages fail, is conducting a broad investigation of the assets of Madoff’s New York-based firm, Bernard L. Madoff Investment Securities LLC. SIPC investigators have so far identified about $1 billion in assets, which will be used to compensate investors.

The SIPC case is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC, 08-01789, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The SEC case is SEC v. Madoff, 08-cv-10791, U.S. District Court, Southern District of New York (Manhattan).

(Published by Bloomberg - April 8, 2009)