Bernie Madoff may have created a messy legal issue for the US Supreme Court.
At issue is a legal conflict between Federal securities law, Federal bankruptcy law, and the common-law institution of fraudulent transfer, which is usually part of State law. Federal securities laws specify that when you get a statement from your broker as to your holdings, your broker is obligated to deliver these securities on demand. It is a legal obligation.
But of course the statements that Madoff’s customers received were complete fiction. Those securities were never purchased. So the bankrupt Madoff estate is suing various parties for their fictitious profits, in an effort to recover the original investments for as many parties as possible. But the Trustee is also trying to recover cash from folks who should have seen the red flags of Bernie’s operation and didn’t do anything about it.
Under bankruptcy law and state-level fraudulent transfer law, an investor can’t just stick his head in the sand and ignore evidence of wrongdoing. This legal tradition goes back to Queen Elizabeth I. Is it fair to customers to change the governing law when a broker, or advisor, goes belly-up?
This issue is being examined in New York District Court and is also at the Federal level. It’s a messy legal conflict created by a messy financial con. Bernie Madoff’s deception has indeed created a very tangled web.
Douglas R. Tengdin, CFA
Chief Investment Officer
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