Second Circuit Holds That SIPA Does Not Permit An Inflation Or Interest Adjustment To 'Net Equity' Claims For Customer Property

In In re Bernard L. Madoff Investment Securities LLC, No. 14-97-bk(L), 2015 WL 727965 (2d Cir. Feb. 20, 2015), the United States Court of Appeals for the Second Circuit held that no adjustment for inflation or interest could be made under the Securities Investor Protection Act, 15 U.S.C. § 78aaa, et seq. ("SIPA"), in calculating "net equity" claims for customer property. The Second Circuit's opinion re-affirms that SIPA is not intended to shield investors from loss, and that its goal is limited to restoring customers of defunct broker-dealers to the pre-liquidation status quo.

Background

In re Bernard L. Madoff arises out of Bernie Madoff's Ponzi scheme. Claimants-Appellants ("Claimants"), former investors of Bernard L. Madoff Investment Securities LLC ("BLMIS"), deposited money with BLMIS for investment. Madoff, however, never invested the funds. To conceal the lack of trading activity, Madoff created fictitious account statements and trading records, and funded customer withdrawals with the principal investments of new and existing customers. Ultimately, the house of cards that was BLMIS collapsed, defrauding customers out of billions of dollars. After the collapse of BLMIS, Trustee-Appellee, Irving H. Picard ("Trustee"), was appointed as trustee for the liquidation of BLMIS pursuant to SIPA.

SIPA

SIPA prioritizes the distribution of customer property in a broker-dealer liquidation. It creates a fund of customer property, separate from the broker-dealer's general estate, for priority distribution exclusively among a failed broker-dealer's customers. Customers share in the fund proportionally, according to each customer's "net equity." SIPA defines "net equity" as the dollar amount of a customer's account which would have been owed by the debtor to the customer had the customer's positions been liquidated, minus any indebtedness of the customer to the debtor as of the filing date.

Bankruptcy Court's Decision

In an effort to recover funds lost in the collapse of BLMIS, Claimants filed SIPA claims in the United States Bankruptcy Court for the Southern District of New York. Claimants asked the Trustee to adjust their proportional share of customer property to reflect inflation over the life of Madoff's fraud, with one Claimant also seeking an interest adjustment to reflect the time-value of money over that time.

The bankruptcy court, however, upheld the Trustee's determination that SIPA does not permit an adjustment for inflation or interest...