Securities Invest. Protection Corp. v. 2427 Parent Corp. (In re Bernard L. Madoff Invest. Securities LLC)

Nos. 14‐97‐bk(L) (August Term 2014)
The Securities Investor Protection Act, 15 U.S.C. § 78aaa, et seq. (“SIPA” or “the Act”), does not permit an inflation or interest adjustment to “net equity” claims for customer property.
Procedural context:
The United States Court of Appeals for Second Circuit affirmed the holding of the bankruptcy court below ruled on a disagreement between the Trustee in the Bernie Madoff fraud case, SIPA, the SEC and various aggrieved claimants who were victims of Madoff's fraud. The Second Circuit certified a direct appeal from the bankruptcy court.
This is another appeal arising in connection with the fraudulent securities case of Bernard Madoff. Because the scope of Madoff's fraud lasted at least three decades, various claimants asked that the Trustee adjust their proportional share of customer property under SIPA to reflect inflation or the time‐value of money. The Trustee and SIPA objected to this request and the SEC was inclined to permit such an adjustment in certain circumstances. The various claimants asserted that adjusting net equity claims for inflation was the fairest method of determining net equity. The bankruptcy court rejected this argument and the Second Circuit affirmed reiterating its earlier holding that “SIPA was not designed to provide full protection to all victims of a brokerage collapse,” and “arguments based solely on the equities are not, standing alone, persuasive.” The Second Circuit further noted that because it is unlikely that a full recovery will be had by all investors each dollar allocated to earlier investors in recognition of inflation would reduce the amount of principal recovered by later investors and, in effect, allow some customers to obtain protection from inflation for which they never bargained, in contravention of the text and purpose of SIPA, and at the expense of customers who have not yet recovered the property they placed in Madoff’s hands. The Court cautioned that its holding was limited to a post‐liquidation adjustment of customers’ net equity calculations not pre-liquidation balance positions.

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