Appeals court dismisses Madoff Ponzi scheme appeal for lack of standing

By Kyla Asbury | Jul 14, 2014

NEW YORK (Legal Newsline) - The U.S. Court of Appeals for the Second Circuit has dismissed an appeal involving the settlement of class action securities claims related to the Bernie Madoff Ponzi scheme.

Circuit Judges Dennis G. Jacobs, Barrington D. Parker and Denny Chin voted in the majority, with Parker authoring the opinion.

"This appeal requires us once again to grapple with the aftermath of the Ponzi scheme run by Bernard L. Madoff," the June 26 opinion states. "Defendants-Appellants PricewaterhouseCoopers and to overturn a partial final judgment entered in the United States District Court for the Southern District of New York...approving the settlement of certain putative class action claims."

The settled claims were brought by the 118 plaintiffs, who were individual and institutional investors in so-called Madoff feeder funds managed by the Fairfield Greenwich Group, according to the opinion.

"The claims were brought against the group as well as its directors and officers," the opinion states. "The non-settling defendants challenge one particular provision in the settlement agreement that provides that investors who file claims under the settlement submit to the district court's jurisdiction for the sole purpose of participating in the settlement and not for any other purpose."

The non-settling defendants contend that the district court erred in approving this provision because district courts cannot permit litigants to agree to insulate themselves from personal jurisdiction if it would otherwise be created as a result of the settlement, according to the opinion.

"In response, the investor plaintiffs contend, among other things, that the non-settling defendants lack standing to lodge this objection," the opinion states. "The non-settling defendants counter that they have standing because the provision in question prejudices their rights to assert that participation in the settlement should bar or limit investor claims against them in other litigation. Because we conclude that the non-settling defendants do not have standing to challenge the settlement, we dismiss the appeal."

The plaintiffs invested money in funds sponsored and managed by the defendants, which, in turn, invested substantially all of their assets with Bernard L. Madoff Investment Securities LLC.

"After discovering that their investments were lost as a result of Madoff's fraudulent scheme, investor plaintiffs brought a putative class action asserting federal securities and state common law claims against the Fairfield Greenwich defendants, their outside public accountants, PricewaterhouseCoopers and Citco and GlobeOp Financial Services LLC, which provided various professional services to the funds," the opinion states.

"In addition to restitution of the $5 billion investor plaintiffs alleged that they, as a class lost, as a result of Madoff's fraudulent scheme, the complaint sought consequential and punitive damages as well as disgorgement of profits purportedly obtained by the defendants."

Following the filing of the motion for preliminary approval of the settlement, the putative class representatives were approached by several putative settlement class members who expressed concern that, as foreign individuals and entities, participation in the settlement class could subject them to clawback actions in United States courts by Irving Picard, the SIPC Trustee for Bernard L. Madoff Investment Securities LLC and Kenneth Krys, the court-appointed Liquidator of Fairfield Sentry Ltd., seeking to recover monies they may have directly or indirectly received through the Fairfield Greenwich Group from Madoff.

"In response to these concerns, on the eve of the preliminary approval hearing, the settling parties submitted an amended proposed order purporting to limit the district court's jurisdiction over settlement class members," the opinion states.

The preliminary approval order was amended and, at the hearing, the non-settling defendants objected to the amended language on the ground that class members who submitted to the court's jurisdiction in order to accept the terms of the settlement could not, at the same time, be permitted to limit the legal consequences of doing so.

The non-settling defendants contended that they were currently facing claims in litigation in the Netherlands and were entitled to argue that any entity that participated in the New York settlement could not pursue claims in any other jurisdiction. The district court overruled the objections and approved the amended preliminary settlement order, according to the opinion.

The district court entered the final order approving the settlement and entering partial final judgment with respect to investor plaintiffs' claims against the Fairfield Greenwich defendants. This appeal followed.

"In reaching this result, we join our sister courts in holding that a settlement which does not prevent the later assertion of a non-settling party's claims...does not cause the non-settling party 'formal' legal prejudice," the opinion states.

"For these reasons, we conclude that the non-settling defendants do not have standing to object to the settlement," the opinion states. "In view of this conclusion, we decline to address the remaining issues argued on appeal."

The 118 plaintiffs in the suit include Jitendra Bhatia, Kishanchand Bhatia, Jayshree Bhatia, Mandakini Gajaria, Abn Amro Life S.A., Bahia Del Rio S.A., Bevington Management, Ltd., Calwell Investment S.A., Diamond Hills Inc. and Hedge Strategy Fund LLC.

The 69 defendants in the suit include Corina Noel Piedrahita, Walter M. Noel Jr., Andres Piedrahita, Jeffrey Tucker, Amit Vigayvergia, Fairfield Heathcliff Capital LLC, Yanko Dellaw Schiava, Philip Toub, Lourdes Barreneche and Cornelis Boele.

U.S. Court of Appeals for the Second Circuit case number: 13-1642-cv

From Legal Newsline: Kyla Asbury can be reached at

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