## Facts

- Bernard L. Madoff Investment Securities LLC (BLMIS) entered SIPA liquidation after discovery of Bernard Madoff’s Ponzi scheme.
- The Diana Trust maintained a BLMIS customer account and filed a SIPA customer claim for $1,120,005.21 based on its final BLMIS account statement.
- The Trust deposited $320,000 into its BLMIS account.
- BLMIS statements reported large account growth (including a reported 2007 balance of $1,046,460) attributable to fictitious trading activity rather than actual securities transactions.
- By 2008, the Trust’s withdrawals exceeded its deposits; the trustee calculated the Trust as having withdrawn more than it invested (a “net winner”).
- The SIPA trustee determined the Trust had no allowable net-equity customer claim under the “net investment/net equity” method (deposits minus withdrawals) and denied the claim.
- The Trust objected, arguing it was entitled to the statement balance.

## Issues

1. In a SIPA liquidation arising from a Ponzi scheme, whether a customer who withdrew more cash than it deposited may assert a SIPA “net equity” customer claim based on the fictitious balance shown on the customer’s final brokerage statement.
2. Whether the trustee properly calculated “net equity” by netting deposits against withdrawals and disregarding fictitious profits where no actual securities were purchased.

## Decision

- The bankruptcy court overruled the Diana Trust’s objection and sustained the trustee’s determination.
- The court held the trustee properly calculated net equity by netting deposits against withdrawals and disregarding fictitious statement profits.
- Because the Trust withdrew more than it deposited and no securities were actually purchased for the account, the Trust had no allowable net-equity customer claim under SIPA.
- The Trust was not entitled to a distribution from the SIPA Customer Fund on a net-equity theory.

## Legal Principles

- In a SIPA liquidation involving a Ponzi scheme, “net equity” is determined by the customer’s net cash investment (cash in minus cash out), not by fraudulent account statements.
- Fictitious profits reflected on brokerage statements do not create a cognizable SIPA customer claim.
- A customer who is a net winner (withdrawals exceed deposits) has no positive net equity and therefore no allowable net-equity claim to the SIPA Customer Fund.
- SIPA’s customer-protection mechanism compensates for missing cash or securities actually entrusted to the broker; where no securities were purchased and net cash investment is non-positive, there is no customer net-equity claim.

## Conclusion

The court denied a SIPA customer claim asserted by a net-winner BLMIS customer, reaffirming that net equity is measured by deposits minus withdrawals and that fictitious statement balances from a Ponzi scheme do not support recovery from the SIPA Customer Fund.


In re Madoff, No. 08-01789 (SMB), 2019 WL 3436542 (Bankr. S.D.N.Y. July 30, 2019)