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Bankruptcy Judge Blocks 401(k) Participants’ Madoff Recovery Claims

A federal bankruptcy judge has blocked the claims of several hundred 401(k) participants seeking to recover money invested by their retirement plans with Bernie Madoff’s investment firm.

The decision, by Judge Stuart Bernstein of the U.S. Bankruptcy Court in Manhattan, rejected the claims of some 308 participants who had balances in one of the following plans; Daprex Profit Sharing and 401K Plan, Felsen Moscoe Company Profit Sharing, Sterling Equities Employees Retirement Plan, or the Orthopaedic Specialty GRP PC Defined Contribution Pension Plan.

In the ruling, Bernstein agreed with Irving Picard, the court-appointed trustee winding down Bernard L. Madoff Investment Securities LLC (Madoff’s investment firm), that the individuals had not invested their money directly with the firm.

In making their case before the district court, the individual plan participants tried to distinguish their claims from “feeder fund” decisions by arguing (among other things) that they had contributed their own money to their plans; they could control the size of their investments or withdraw or roll them over; they received statements; and they could choose among alternatives when directing their plans to invest their respective shares of the plans’ assets. However, the court held that this was “not equivalent to having a direct financial relationship with or directly entrusting one's own funds to a broker-dealer, or exercising sole control over investment decisions.” 

Additionally, in the bankruptcy court filing only two of the 308 participant-claimants filed responses, meaning that the remaining 306 claimants “failed to sustain their burden of proving that they were “customers” of BLMIS,” and by failing to respond to the requests for admission from the bankruptcy trustee, they in the eyes of the court admitted that, among other things, they “…did not maintain accounts with BLMIS in his own name…”

All is not (yet) lost for these participants, however. The plans they participate in have also filed recovery claims against Madoff’s firm — though the Wall Street Journal reports that the at least of one of them has been denied by Picard.

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