The US Court of Appeals for the Second Circuit upheld a lower court finding Thursday that Maddoff investors who profited must pay back their earnings, even if they were not aware of the Ponzi scheme.
The investors involved were people who, at the time of the collapse of Bernard L. Madoff Investment Securities LLC, received more money than their principal investment. However, unknown to them at the time was the fact that these profits were truly other people’s investments. The investors claim they are entitled to keep the “profits” under the affirmative defense given by § 548(c) of the Bankruptcy Code. This section “permits a transferee who takes an interest of the debtor in property ‘for value and in good faith’ to retain the transfer to the extent of the value given.”
The court, however, found that the transfers to the investors were not “for value.” The general rule, found in Scholes v. Lehmann, is that transfers in Ponzi schemes are never for value. Further, the court found that allowing the transfers to be
“for value” would conflict with the Securities Investor Protection Act because of the priority given to customers under the act.
The court found that there was no compelling argument brought by the defendants and affirmed the lower court’s grant of summary judgment. As for Madoff, he was sentenced to 150 years in prison and is currently serving his term.