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Madoff Investors File Petition for Forced Bankruptcy

Apr 14, 2009 | Parker Waichman LLP Investors defrauded by Bernard Madoff have filed an involuntary bankruptcy petition against the admitted swindler.  If granted, Madoff's assets will be subject to liquidation under Chapter 7 bankruptcy.

According to The Wall Street Journal, petitioning creditors include Blumenthal & Associates Florida General Partnership, Martin Rappaport Charitable Remainder Unitrust, Martin Rappaport, Marc Cherno and Steven Morganstern.  

Earlier this month, the investors petitioned a federal judge to rescind an order that prevented a forced bankruptcy. Federal prosecutors and the Securities and Exchange Commission (SEC) have indicated they intend to seek forfeiture and disgorgement of Madoff’s assets in both the criminal and civil cases. But according to the attorney representing the investors behind the bankruptcy petition, it is unclear if they intend to distribute any such funds to Madoff’s customers and what rules would govern any such distribution.

“Under these circumstances, considerations of efficiency and fairness to victims dictate coordinated proceedings in the bankruptcy court,” the petition said.

Both the SEC and the Department of Justice tried to block the bid, insisting that forced bankruptcy was not needed to insure that Madoff’s victims could collect from his assets.  But U.S. District Judge Louis Stanton in New York granted the request to allow a forced bankruptcy.  In explaining his decision, Judge Stanton said the bankruptcy filing might better enable creditors to access Madoff assets that are not “proceeds of his fraud."  Bankruptcy law provides a “familiar, comprehensive” set of statutes for investors seeking “his personal assets other than those criminally forfeitable,” Stanton said.

Investors wasted no time, and filed their claim against Madoff with the U.S. Bankruptcy Court in Manhattan yesterday.  According to The Wall Street Journal,  the filing says investors' claims are based on breach of contract, conversion and fraud.  It also says that because of Madoff's guilty plea in his criminal case, the claims are not disputed.  The investors claim Madoff owes them a total of $64 million.  That amount was based on the balances contained in the last statements they received from  Bernard L. Madoff Investment Securities LLC, the Journal said.

On March 12, Madoff pleaded guilty to 11 fraud counts. Last November, Madoff told his investors that his fund held more than $65 billion, but in reality, he only had a fraction of that amount.

Since his guilty plea, Madoff has been held at the Manhattan Correctional Center.  He faces a June sentencing and faces as much as 150 years in prison.

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