[ by Melanie Gretchen ]

Bernie Madoff trustee Irving Picard has quite a history with the Bernie Madoff case.  Now, NY Attorney General Eric Schneiderman is making a case of the trustee himself, accusing Mr. Picard of trying to intimidate the state’s top law enforcers so they'll overturn a $410 million settlement with a former Ponzi-scheme investor.

Mr. Schneiderman's beef with Mr. Picard goes back to 2009, and could affect the trustee's future success in recovering $17 million in missing customer money.  To date, Picard has raised around $9 billion for customers, mostly from settlements, although some of it is still tied up in court challenges.

Findings and Accusations. Most recently, on 8/31/12, Mr. Schneiderman asked a district judge to take over the case so he could complete the settlement of a state lawsuit against J. Ezra Merkin, who allegedly diverted customer funds to Madoff.  Mr. Picard has asked a bankruptcy judge to block the deal, contending that it compromises his own efforts to collect $500 million from Merkin and his funds for a different group of Madoff investors.

Before U.S. Bankruptcy Judge Burton Lifland, who oversees the Madoff brokerage liquidation, could tell the 2 parties to go into mediation, Mr. Picard appealed to Judge Lifland to stop the Merkin deal last month.  "If other attorneys general around the country could simply walk into state courts and secure settlements as the NYAG did, the BLMIS estate would be decimated, with residents of various states favored."

Judge Lifland told the 2 parties to go into mediation, and selected former judge James Garrity Jr. to serve as mediator.

Just the Beginning? This action is the latest effort by Mr. Picard to interfere with the attorney general’s power to enforce New York's Martin Act and other legal rights of the people of the state, Mr. Schneiderman said in a filing in federal court in Manhattan.  Since 2009, the trustee has "made intermittent efforts to intimidate" New York's attorneys general, threatening to sue to make them turn over any funds taken from Merkin, the filing said:

"There is no basis in law, fact, or equity for the trustee’s claims."  Removing the case from bankruptcy court "will promote judicial efficiency and avoid further delay in making distributions from the Merkin defendants’ assets" to hundreds of investors who otherwise would get nothing from Madoff’s estate," he said.

Earlier Attempt #1: Threat of Suit. According to Mr. Schneiderman, as stated in his filing, he recalled a scenario late last year, where a lawyer representing Picard called the attorney general’s office, saying he had heard a settlement was close.  The lawyer continued, saying that the trustee would sue to stop the deal "if the NYAG did not agree within 48 hours that the bankruptcy court would have exclusive jurisdiction over any disputes between the trustee and the NYAG."

• Under the deal, Merkin and his funds would pay (much needed) $405 million to compensate customers, and $5 million to New York State.  Mr. Schneiderman and his predecessor, Andrew Cuomo, used state law including the Martin Act to pursue Merkin allegedly for fraudulent conduct, and weren't interfering with separate claims pursued by Mr. Picard, according to the filing.
• Mr. Picard argued that under bankruptcy law he has the sole right as trustee to sue former Madoff investors who allegedly participated in Merkins's fraud, and to use the proceeds to pay customers whose claims he has authorized.  Mr. Schneiderman and Mr. Cuomo were acting for Merkin customers who don’t have approved claims to money raised by Mr. Picard, Mr. Schneiderman said.

Although the attorney general rejected the demand, he offered a meeting that the lawyer said he would set up, and didn't, Mr. Schneiderman said.

Earlier Attempt #2: Further establishing his claim, Mr. Picard in January sued California Attorney General Kamala Harris.  Here, he alleged her $270 million lawsuit against a former Madoff investor's estate interfered with the collection of assets needed to help compensate Madoff victims, and would help only Californians.

Current Status. Mr. Schneiderman is not alone.  He sues as district judges are reviewing hundreds of Picard’s lawsuits against companies and individuals question whether the trustee is using a valid interpretation of his powers under bankruptcy law, or his actions conflict with state and federal law.  Will he or Mr. Picard have better luck returning money to Madoff's victims?

For further details, go to [Bloomberg, 9/4/12].

The suit: Picard v. Schneiderman, 12-01778, U.S. Bankruptcy Court, Southern District of New York (Manhattan).