SIPC Trustee Sues Ruth Madoff for $45 Million

When Bernard Madoff was arrested after admitting he lost tens of billions of dollars of investors' money with a massive Ponzi scheme, his wife Ruth seemed to have little to do with the scheme and was free to spend the money the couple had left.

However, Securities Investor Protection Corporation (SIPC) trustee Irving H. Picard has filed a lawsuit against Ruth Madoff in US Bankruptcy Court in Manhattan last week seeking to get back nearly $45 million in funds transferred during the past six years from BLMIS directly to Mrs. Madoff. The trustee was appointed to liquidate the business of Bernard L. Madoff Investment Securities LLC (BLMIS) for bankruptcy proceedings.

Mrs. Madoff has not been charged in any of her husband's scheme and agreed to give up all of her possessions in return for a promise that federal prosecutors wouldn't pursue $2.5 million not tied to the fraud. However, the money isn't protected from civil lawsuits the trustee or separate investors could bring against her.

The suit alleges Mrs. Madoff pocketed $23.7 million from the business in the last two years, including $1.1 million to pay personal expenses charged to her American Express card and $2.7 million in 2007 to pay for her yacht. It seeks the return of nearly $45 million that it believes she knew or should have known belonged to the business and its clients, along with unspecified compensatory and punitive damages.

Last week, US Bankruptcy Court Judge Burton Lifland signed off on an agreement requiring Mrs. Madoff to report any purchases over $100 to the trustee and froze her assets in response to the trustee's claim against her.

Securities Investor Protection Corporation

The SIPC was created by Congress in 1970 to protect investors when a brokerage firm fails and cash and securities are missing from accounts. The SIPC is the US investor's first line of defense in the event a brokerage firm fails, owing customer cash and securities that are missing from customer accounts. SIPC either acts as trustee or works with an independent court-appointed trustee to recover funds.

Fraudulent Transfers and Conveyances

In bankruptcy proceedings, a trustee has the power to set aside or "avoid" certain transfers of the debtor's assets. The trustee may cancel a fraudulent transfer of money or property made during a certain period of time prior to the filing of the bankruptcy petition so money isn't hidden from creditors. This forces the return of the payments or property transferred for the benefit of all creditors.

Brokerage Firm Liquidations

If you receive a letter saying that your brokerage firm has closed, the SIPC has initiated a Direct Payment Procedure or a liquidation proceeding in court, you should immediately do the following:

• Gather key information together, such as brokerage account records, statements and trade confirmation slips of securities purchases or sales, cancelled checks and correspondence with your brokerage firm
• Check your account statements for accuracy
• Make sure the trustee in the liquidation proceeding has your correct address
• Obtain, fill out and submit a claim form in a timely way

You can find additional information in the SIPC "The Investor's Guide to Brokerage Firm Liquidations: What You Need to Know... and DO" brochure

Questions for Your Attorney

• My brokerage firm is being liquidated but I didn't get a claim form from the trustee. What should I do?
• Can SIPC return the amount of my initial investment if I was the victim of fraud?
• How long does it take to transfer an account from a defunct brokerage firm to a financially healthy brokerage firm in a liquidation proceeding?