Baupost Pushes For OK On Bargain-Basement Madoff Claim

Law360, New York (March 31, 2015, 5:11 PM ET) — Hedge fund Baupost Group LLC bumped heads with a New York bankruptcy judge Tuesday, pushing to consummate its deeply discounted purchase of a claim against the Bernard Madoff bankruptcy estate that later turned out to be worth $230 million and appeared to be on track until it was halted by the Second Circuit in January.

U.S. Bankruptcy Judge Stuart M. Bernstein — overseeing the Chapter 15 case of Madoff feeder fund Fairfield Sentry Ltd., which sold the Securities Investor Protection Act claim to Baupost in 2010 for 32 cents on the dollar in a British Virgin Islands auction — did not explicitly say he was leaning toward voiding the deal.

But he repeatedly pushed back against a slew of arguments put forward by Eric D. Winston of Quinn Emanuel Urquhart & Sullivan LLP, counsel for Baupost.

The Boston-based hedge fund, through its Farnum Place LLC investment vehicle, is trying to rescue the transaction after the Second Circuit concluded in January that its impact on creditors of Fairfield Sentry — a liquidating entity that funneled money into Madoff’s Ponzi scheme — must be assessed in U.S. bankruptcy court even though it took place in a foreign jurisdiction.

Winston asserted Tuesday that a decision to undo the deal would come at “a great cost” to the integrity of the auction process and would make it more difficult for bidders to have confidence in foreign liquidations. That, in turn, would put creditor recoveries at risk in other cases, he said.

But Judge Bernstein didn’t seem to agree. He called the case “very unusual” in posture, suggesting he didn’t see the same sweeping impact.

Judge Bernstein also flipped Winston’s argument, asking whether a decision to approve Baupost’s undersized bid in the face of the claim’s rising value would do more harm than good by hurting Fairfield Sentry creditors.

Winston countered that Baupost’s motive for bidding on the claim during a period of relative uncertainty was to speculate on a rise in value when others would not.

“This wasn’t real property or a bag full of widgets,” he said, asserting that the risk his client took should be respected.

Pressing for a decision to undo the auction was David J. Molton of Brown Rudnick LLP, counsel for British Virgin Islands-based liquidator Kenneth Krys.

Three days after Krys approved Baupost’s bid in 2010, a $7 billion settlement between Bernard L. Madoff Investment Securities LLC trustee Irving H. Picard and Jeffry Picower, a primary beneficiary of the Ponzi scheme, sent the value of the claim through the roof.

Molton said officials like Krys have sweeping power to cancel such transactions until bankruptcies are confirmed. He called that power unremarkable in the context of a U.S. bankruptcy and said that if the transaction is upheld, the upshot will be that the Fairfield Sentry estate will have to cut a $38 million check to the hedge fund.

“A trustee can always walk away when other facts present themselves,” he said. “At the end of the day all Mr. Winston can say is ‘I won the auction so give me my price.’”

Arguing for Krys was David J. Molton of Brown Rudnick LLP.

Arguing for the hedge fund was Eric D. Winston of Quinn Emanuel Urquhart & Sullivan LLP.

The case is In re: Fairfield Sentry Ltd. et al., case number 1:10-bk-13164, in the U.S. Bankruptcy Court for the Southern District of New York.

–Editing by Brian Baresch.

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