Trustee Unwinding Madoff Feeder Funds Sues 9 Firms For $65 Million

By Joseph Checkler (Dow Jones Daily Bankruptcy Review)–The trustee winding down the feeder funds for Bernard Madoff’s Ponzi scheme is suing a group of banks and investment firms for more than $65 million, saying those firms invested in the funds and received payments for profits that were actually fake.

Kenneth Krys, the British Virgin Islands accountant overseeing the liquidation of several Fairfield Greenwich Group funds, filed the lawsuits against nine firms Wednesday in U.S. Bankruptcy Court in Manhattan seeking to claw back funds that investors withdrew before the Ponzi scheme’s collapse.

The largest of the suits is for $35.2 million against a Virgin Islands-based entity called Jared Trading Ltd.,  which the trustee says withdrew the money and immediately directed it into a Goldman Sachs Group Inc. (Goldman Sachs Group, Inc.) account in March 2006. No contact information could be immediately found for Jared.

The only other plaintiff listed as having withdrawn more than $10 million is an affiliate of Barclays PLC (BCS, BARC.LN) called Barclays Madrid, which is being sued for $12.8 million. A Barclays spokesman declined comment.

The seven other defendants are being sued for amounts ranging from between $1.8 million and $3.5 million each and include affiliates of Bank of America Merrill Lynch and Schroder & Co. Bank AG. Bank of America didn’t immediately respond to a request for comment. Schroder & Co. declined to comment.

The Fairfield funds–Fairfield Sentry Ltd., Fairfield Sigma Ltd. and Fairfield Lambda Ltd.–were the biggest feeders of money into Madoff’s brokerage business. In all, they fed about $7 billion to Madoff.

Last year, the Fairfield liquidators reached a deal with Irving Picard, the trustee for investors hurt by Bernard Madoff’s fraud, in which they resolved claims against each other and agreed to jointly pursue the fund owners, including Connecticut financier Walter Noel.

Under the settlement, anywhere from 40% to 85% of the redemption payments clawed back from Fairfield funds’ investors are earmarked for the estate’s creditors.

The deal with Picard provides the framework to resolve much of the litigation involving the network of other feeder funds that funneled money to Madoff. It also allows the investors in the Fairfield funds, who were indirectly invested with Madoff but who can’t make claims with Picard, to recover up to $160 million. In return, the Fairfield funds paid $70 million to Picard and gave up their claims to $1 billion lost by its investors.

The Fairfield funds, which are being liquidated in proceedings in the British Virgin Islands, also sought bankruptcy protection in the U.S. under Chapter 15 in June 2010.

Under U.S. bankruptcy law, the liquidators can seek to recover funds transferred out of Madoff’s investment business before its collapse to help pay back those investors swindled by Madoff.

Since being named the trustee to Madoff’s estate, Picard has filed more than 1,000 lawsuits and has recovered about $11 billion of the more than $17 billion of capital believed to be lost in the Madoff fraud.

The Fairfield funds were offshore funds managed by other Fairfield Greenwich Group entities owned primarily by Noel, Jeffrey Tucker and Andres Piedrahita.

In 2010, Picard sued the Fairfield owners and others claiming they ignored warning signs about the Ponzi scheme in order to rake in millions of dollars in fees.