Victims of Bernard Madoff will get another chance at recovering $343 million from Citigroup Inc. after a federal appeals court overturned a ruling dismissing a claim against the bank.
The U.S. Court of Appeals in New York on Monday reinstated a suit against Citi by Irving Picard, the trustee charged with recovering money for Madoff’s victims, over funds transferred to the bank. Picard claimed Citi failed to act on red flags concerning Madoff, but a bankruptcy court dismissed the suit, finding the trustee had not shown the bank acted with “willful blindness” to possible fraud.
The appeals court said “willful blindness” was the wrong standard to apply and the burden of proof shouldn’t have been on Picard. The ruling revived similar claims for $213 million from Legacy Capital Ltd., a British Virgin Islands corporation that invested solely with Madoff, and a $6.6 million claim against Khronos LLC, which provided accounting services to Legacy.
Citigroup didn’t immediately return a phone message seeking comment on the ruling. A lawyer for Legacy and Khronos also didn’t immediately respond to requests for comment.
Lower standard
Picard is seeking to recover money he says Citi received between June 2005 to March 2008 from Rye Select Broad Market Prime Fund, one of the so-called “feeder funds” that pooled investor money to be directed into Madoff’s firm. The trustee claims Citi uncovered but failed to act on evidence Madoff wasn’t making the investments he claimed and reported returns that seemed statistically impossible.
U.S. District Judge Jed Rakoff had ruled earlier in the case that Citi could keep the money unless Picard could show the bank willfully blinded itself to Madoff’s fraud. The bankruptcy court, applying that standard, tossed the case.
The appeals court overturned both rulings and said the bankruptcy court should have applied a lower “inquiry notice” standard under which Picard’s claim could proceed if he can allege that Citi and the other defendants had information that would have caused a reasonable person to investigate Madoff further. The burden is on the defendants to prove otherwise, the court said.
Madoff was arrested in 2008 and was subsequently sentenced to 150 years in prison after admitting he stole more than $19 billion in history’s biggest Ponzi scheme. He died in a federal prison in North Carolina in April.
The case is Picard v. Citibank N.A., 20-01333, Second U.S. Circuit Court of Appeals (Manhattan).
— With assistance from Daniel Gill
