Madoff Trustee Seeks $1 Billion Harley Default Award

Date: Tuesday, July 7, 2009
Author: Erik Larson, Bloomberg

The trustee liquidating Bernard Madoff’s investment-advisory business asked a judge for a default ruling against Harley International Ltd., arguing that the hedge fund failed to respond to a lawsuit accusing it of taking $1.07 billion in fake profit from Madoff’s firm.

If trustee Irving Picard’s July 2 request is granted, the hedge fund, run by Cayman Island-based Euro-Dutch Management Ltd., would be ordered to return money it allegedly withdrew during the six-year period before New York-based Bernard L. Madoff Investment Securities LLC collapsed in a $65 billion fraud. Harley is being liquidated in a Cayman Islands court.

“We will go wherever we believe it would be appropriate for us to pursue a judgment,” Picard said in an e-mail when asked how the money will be recovered if his motion is granted by U.S. Bankruptcy Judge Burton Lifland in New York.

Harley, a so-called feeder fund that allegedly directed more than $2 billion of investor money to Madoff since 1996, didn’t respond to the trustee’s May 12 complaint, and a one- month deadline to do so wasn’t extended, according to a June 30 affidavit filed by Elizabeth Scully, one of Picard’s lawyers with the firm Baker & Hostetler LLP in New York.

Battle Over Assets

If the motion is granted, Picard may end up battling Harley’s creditors for its remaining assets as they are sold. Kinetic Partners LLP, the company that’s liquidating Harley in the Cayman Islands, held a meeting of the hedge fund’s creditors on the Caribbean island on June 16, according to its Web site.

Picard sent Kinetic a notice of his motion for default judgment, court records show. Kinetic spokeswoman Charlotte Luer didn’t return a call seeking comment, while a call to Euro-Dutch Management in the Cayman Islands wasn’t answered.

Madoff, 71, pleaded guilty in March and was sentenced on June 29 to 150 years in prison for using money from new clients to pay earlier investors in the biggest U.S. Ponzi scheme. Picard has sued Madoff’s biggest clients, including Harley, seeking a total of more than $12 billion to repay thousands of victims a percentage of their claims.

According to Picard’s complaint, Harley received “unrealistically high and consistent annual returns” of about 13.5 percent from 1996 to 2008. The hedge fund allegedly withdrew most of the disputed $1.07 billion in the two years before Madoff’s Dec. 11 arrest. The hedge fund withdrew a total of $425 million in the 90 days before Madoff’s firm collapsed, Picard says.

Lack of Transparency

Madoff’s compensation arrangement for Harley and the company’s lack of transparency “should have caused an experienced investment entity like the defendant and its managers to question the legitimacy of Madoff’s operation,” Picard said in the complaint.

Harley managed $2.76 billion as of Oct. 31 and returned an average of 10.9 percent annually since April 1996, according to a monthly update sent to investors.

Euro-Dutch’s directors are former Fortis Fund Services directors Anthony L.M. Inder Rieden and Dawn Davies, according to the firm’s 2007 financial statement. Fortis Prime Fund Solutions Ltd. was the administrator of Harley at the time of the report.

The case is Picard v. Harley International (Cayman) Ltd., 09-01187, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Erik Larson in New York at elarson4@bloomberg.net.