In re Madoff

Bernard L. Madoff (defendant) operated the largest Ponzi scheme in history through Bernard L. Madoff Investment Securities LLC (BLMIS) (defendant) by satisfying customer withdrawal requests with deposits made by other customers. The Diana Trust (plaintiffs) held a BLMIS account (the account). There was a total of $320,000.00 in cash deposited in the account. According to the BLMIS, the balance of the account in 2007 was $1,046,460.00. Cash withdrawals from the account by the Diana Trust exceeded the cash deposits by $345,000.00, and the balance reported on monthly statements consisted of fictitious entries made by Madoff and his staff. By 2008, the Diana Trust had withdrawn a total amount that exceeded the account deposits by $407,500.00. In 2008, the Securities Investor Protection Corporation (SIPC) filed an application for a protective decree pursuant to the Securities Investor Protection Act (SIPA) in order to provide customers of BLMIS the protections afforded by SIPA. The district court granted SIPC’s application and appointed a trustee and removed the SIPA proceeding to the bankruptcy court and began liquidation. After the commencement of the liquidation, the Diana Trust filed a customer claim for the balance of the account reflected on the last BLMIS monthly statement before Madoff’s arrest for $1,120,005.21. To compute a customer’s net-equity claim, the trustee ignored the BLMIS statements and fictitious profits and calculated the account’s net equity by netting deposits against withdrawals. If a customer withdrew more from the BLMIS account than he deposited, he was a net winner and did not have a net-equity claim. The trustee denied the Diana Trust’s customer claim because no securities were ever purchased for the account and the amounts withdrawn from the account were more than those deposited. The Diana Trust objected to the trustee.