Bloomberg News

Citigroup Says $430 Million Madoff Lawsuit Isn’t ‘Plausible’

July 27, 2011

(Updates with excerpt from filing in third paragraph.)

July 27 (Bloomberg) -- Citigroup Inc., sued by the trustee liquidating Bernard Madoff’s firm to recover $430 million pulled from the Ponzi scheme before it collapsed, asked a bankruptcy judge to throw out the lawsuit.

The trustee doesn’t allege and can’t claim that Citigroup had “actual knowledge” of Madoff’s insolvency or that any money received was taken with a “fraudulent purpose,” the New York-based bank said in a filing yesterday in U.S. Bankruptcy Court in Manhattan. The bank also rejected the trustee’s assertion that it should have detected the fraud at Bernard L. Madoff Investment Securities LLC.

“The trustee offers no plausible reason why financial institutions such as the Citi defendants would place hundreds of millions of dollars with a feeder fund to a Ponzi scheme so as to obtain fees,” Citigroup said in the filing. “The only plausible explanation is that the Citi defendants, like many others, were deceived by Madoff’s fraud and lost millions as a result.”

The trustee, Irving Picard, is demanding the return of transfers of $430 million to Citigroup from two feeder funds that invested with Madoff, the Rye Select Broad Market Prime Fund LP and Fairfield Sentry Ltd. He said in a complaint unsealed in February that a Citigroup executive “concluded” by June 2007 that returns reported by Fairfield Sentry couldn’t have come from the publicized trading strategy.


The executive reached his conclusion after meeting with Harry Markopolos, an analyst and whistleblower who also alerted U.S. regulators to the fraud, Picard said. Madoff was arrested in December 2008.

“The trustee largely relies on the combination of widely known but innocuous information about BLMIS, along with obscure economic discrepancies developed by the trustee and his experts over the past two years,” Citigroup said in the filing.

The bank’s transactions with the feeder funds consisted of a margin loan to the Prime fund that was repaid in March 2008, and a swap and securities sale with Fairfield Sentry, Citigroup said. Those transactions are protected by so-called safe-harbor laws, designed to uphold securities contracts, and can’t be undone, it said.

Around March 2008, Citigroup had “red flag information” that Madoff was making fraudulent transfers from an unidentified employee whose previous firm had blacklisted Madoff-related investments, Picard said in the lawsuit.

Unwinding Trades

Soon after, the bank’s Citibank unit began to unwind its Madoff trades and rid itself of its remaining Madoff exposure, he said.

“The complaint is devoid of any well-pleaded factual allegations that Citibank’s decision, reached in the late winter or early spring of 2008, was motivated by concerns that BLMIS was insolvent or engaged in a Ponzi scheme,” the bank said in its filing.

Picard deemed it a sign of “bad faith” that Citigroup met with Madoff in 2006, the bank said.

“In multiple other complaints, the trustee alleges the exact opposite -- that it was Madoff’s refusal to meet with a transferee that was a ‘red flag’ indicative of fraud,” Citigroup said.

Amanda Remus, a spokeswoman for Picard, said Citigroup’s move to dismiss the suit was expected and the trustee would respond “at the appropriate time.”

Danielle Romero-Apsilos, a Citigroup spokeswoman, declined to comment beyond yesterday’s filing.

Kingate Global

Separately, Picard has named an affiliate of the bank, Citi Hedge Fund Services Ltd. of Bermuda, in a $975 million suit against feeder fund Kingate Global Fund Ltd., saying it took fees of more than $4 million from Kingate.

While Citigroup is fighting Picard in bankruptcy court, at least four banks have taken their Madoff cases to district court. U.S. District Judge Colleen McMahon in Manhattan is handling Picard’s $19 billion suit against JPMorgan Chase & Co. and claims of $2.6 billion against UBS AG.

U.S. District Judge Jed Rakoff is handling Picard’s $9 billion suit against HSBC Holdings Plc and feeder funds, and a $59 billion suit against UniCredit SpA, Bank Medici AG, its founder, Sonja Kohn, and dozens of Italian and Austrian parties.

Madoff, whose Ponzi scheme cost investors about $19 billion in principal, is serving a 150-year prison sentence in Butner, North Carolina.

The case is Picard v. Citibank, 10-05345, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

--Editors: Andrew Dunn, Michael Hytha

To contact the reporter on this story: Linda Sandler in New York at; Edvard Pettersson in Los Angeles at

To contact the editor responsible for this story: John Pickering at; Michael Hytha at

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