FRAUDULENT DISPOSITIONS: unravelling fraudulent transactions postMadoff

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FRAUDULENT DISPOSITIONSunravelling fraudulent
transactions post-Madoff

• James Corbett QC TEP

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The Madoff Scandal, 2008 one big lie

• Charles Ponzi, 1882-1949
• The Ponzi Scheme, 1920 expanding the pool of
  suckers
• Bernard Madoff, 1938-
• The Madoff Variant, 1980s intelligent and
  sophisticated suckers

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Madoff civil proceedings

• Against Madoff
• By the SEC
• Class actions in the US (about 120)
• Against others
• Madoff companies and outside service providers
• Company operatives and employees
• Family members
• By
• Trustee for liquidation of Madoff businesses
  (Irving Picard)
• Investors

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Claims made or intimated by Irving Picard

• We are looking at every member of the Madoff
  family (20/2/2009)
• Preferential payments made shortly before the
  collapse of the Madoff companies on 8/4/2009
  (against a BVI company)
• Against investors who withdrew funds before the
  fraud was revealed
• Who knew or had notice of the fraud
• Who did not know or have notice but who are
  liable to clawback (US405 million)

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Transactions open to attack in bankruptcy

• Typically
• Transactions at an undervalue
• Preferences
• But can be more (transactions intended to hinder,
  delay or defraud a creditor)
• Examples
• Insolvency Act 1986, ss 339-342 (EW)
• 11 USC, ss 547, 548 (US)
• Proceedings by trustee for benefit of all
  creditors

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Transactions at undervalue

• England
• Transaction
• That is a gift or provides the giver shall
  receive no consideration
• In consideration of marriage or civil partnership
• For a consideration the value of which in
  money/moneys worth is significantly less that
  the value in money/moneys worth of the
  consideration provided
• At a relevant time (ie, within 5 years ending
  with the day of presentation of the bankruptcy
  petition)
• Court may make such order as it thinks fit to
  restore the position

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Preferences

• US
• Trustee may avoid any transfer of an interest of
  the debtor in property
• To or for the benefit of a creditor
• For or on account of an antecedent debt owed
  before the transfer
• Made while the creditor was insolvent
• Made on or within 90 days before the filing of
  the petition longer if the creditor was an
  insider
• That enabled the creditor to receive more than if
  the transfer had not been made
• Limitations on avoidance in case of, eg, payment
  of ordinary business debts

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Transactions open to attack without bankruptcy
Fraudulent Dispositions

• Term of art
• Anguilla (Fraudulent Dispositions Act)
• Cayman Islands (Fraudulent Dispositions Law)
• Alternative formulae
• transactions defrauding creditors (Insolvency
  Act 1986, EW)
• fraudulent transfers and obligations (Uniform
  Fraudulent Transfer Act, US)
• But NB same terminology may also be used in
  bankruptcy laws

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Specimen provisions (1)

• Anguilla
• Fraudulent Dispositions Act, s 3 (1) Subject to
  the provisions of this Act, every disposition of
  property made with intent to defraud and at an
  undervalue shall be voidable at the instance of a
  creditor thereby prejudiced.
• Burden of proof on creditor
• Action must be brought within 3 years of date of
  disposition.
• S 4 creates important savings of rights for
  transferee or trust beneficiary not proved to
  have acted in bad faith

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Specimen provisions (2)

• England
• Insolvency Act 1986, s 423(1) This section
  relates to transactions entered into at an
  undervalue.
• S 423(3) In the case of a person entering into
  such a transaction, an order shall only be made
  if the court is satisfied that it was entered
  into by him for the purpose (a) of putting assets
  beyond the reach of a person who is making, or
  may at some time make, a claim against him, or
  (b) of otherwise prejudicing the interests of
  such a person in relation to the claim which he
  is making or may make.
• Court may make such order as it thinks fit to
  restore the position to what it would have been
  and to protect the interests of victims of the
  transaction. NO time limit on transaction.

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Madoff the difference

• The sheer amount of the deficiency (US65
  billion)
• The timing
• The determination of the claimants
• The nature of the Ponzi scheme the need to make
  payouts (and therefore clawback provisions)
• The location of assets
• The use of assets by recipients
• Trusts (Anguilla FDA, s 7 Bahamas FDA, s 8, etc)
• Other?

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Thank you

• James Corbett QC TEP
• jcorbett_at_serlecourt.co.uk