U.S. Appeals Court Revives Madoff Trustee Lawsuit Against Citigroup

By Jonathan Stempel | August 31, 2021

NEW YORK — A federal appeals court on Monday said Citigroup Inc must face a $343.1 million clawback lawsuit by the trustee liquidating Bernard Madoff’s former firm, who accused the bank of turning a blind eye to the late swindler’s Ponzi scheme.

The 2nd U.S. Circuit Court of Appeals in Manhattan said lower court judges incorrectly required the trustee Irving Picard to prove Citigroup lacked good faith by being “willfully blind” to “red flags” suggesting a high probability of fraud.

It said the correct standard was whether the New York-based bank knew “suspicious facts” about Madoff that would have caused a reasonable person to follow up.

The $343.1 million represented money that Citigroup received between 2005 and 2008 from a Madoff “feeder fund,” Rye Select Broad Market Prime Fund LP, that had borrowed from the bank to invest with Bernard L. Madoff Investment Securities LLC.

Picard said Citigroup accepted that money despite internal suspicions that Madoff’s trading activity and investment returns were a sham.

U.S. Bankruptcy Judge Stuart Bernstein in Manhattan dismissed Picard’s case after another judge, U.S. District Judge Jed Rakoff, imposed the willful blindness standard.

But in Monday’s 3-0 decision, Circuit Judge Richard Wesley said the plain meaning of good faith in the U.S. Bankruptcy Code required that Citigroup be only on “inquiry notice” of Madoff’s fraud.

The appeals court also revived similar clawback lawsuits against Legacy Capital Ltd and Khronos LLC, seeking a combined $219.8 million.

Lawyers for Picard had no immediate comment. Citigroup declined to comment. A lawyer for Legacy and Khronos did not immediately respond to a request for comment.

Picard has recouped nearly $14.5 billion for Madoff customers, who he has estimated lost $17.5 billion.

Madoff died on April 14 at age 82 in prison, where he was serving a 150-year sentence.

The cases are Picard v. Citibank NA et al, 2nd U.S. Circuit Court of Appeals, No. 20-1333; and Picard v. Legacy Capital Ltd et al in the same court, No. 20-1334.

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