PEOPLE v. Geraldine Fabrikant et al., Objectors–Appellants. (2021)

Orders, Supreme Court, New York County (Saliann Scarpulla, J.), entered July 16, 2020, and July 20, 2020, which, inter alia, granted the motion by the court-appointed receiver for relief defendant Ascot Partners, L.P. (Ascot) to approve the “Net Investment Value” methodology for distributing Ascot's assets, unanimously affirmed, without costs.  Objector Menachem Sternberg's appeal from the foregoing orders, unanimously withdrawn, before argument, without costs, pursuant to the parties' stipulation dated May 3, 2021.

In 2009, Ascot was placed into an equitable receivership to pursue recovery on behalf of its investors of funds stolen by Bernard L. Madoff Investment Securities (BLMIS).  After marshalling limited funds to distribute to investors, the receiver submitted a proposed plan of distribution using the Net Investment Value (NIV), which adopted a “cash in/cash out” approach, taking into account any “collateral recoveries” the investor might have received, to calculate a pro rata percentage of the investor's “net investment” against the total net investment, which was then applied to the amount available for distribution.  Several investors, including objectors, urged the court to adopt the Last Statement Method (LSM) instead, which would distribute funds based on the values in the investors' last statements before the fraud was discovered.

Contrary to objectors-appellants' contention, the court properly evaluated the receiver's proposed distribution according to whether it was “fair and reasonable” (see SEC v. Wang, 944 F.2d 80, 81 [2d Cir.1991]), without consideration of the limited partnership agreement (LPA) in effect, which provided for the LSM. Ascot was under a receivership directed to pursue equitable remedies, and any distribution plan was subject to court approval.  Significantly, even if Ascot itself was not a Ponzi scheme, virtually all of its assets were invested in BLMIS, rendering any profits “fictitious,” since they were based on nonexistent security trades.

Under the circumstances, the court providently exercised its discretion in determining that the NIV was the most equitable methodology to employ in distributing a limited pool of money to Ascot's investors (see In re Tremont Sec. Law, State Law and Ins. Litig., 699 Fed. Appx. 8, 15 [2d Cir.2017], cert denied sub nom.  Haines v. Lange, ––– U.S. ––––, 138 S. Ct. 1264, 200 L.Ed.2d 417 [2018];  see generally In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d 229, 238 [2d Cir.2011], cert dismissed sub nom.  Sterling Equities Assoc. v. Picard, 566 U.S. 1032, 132 S.Ct. 2712, 183 L.Ed.2d 65 [2012], cert denied sub nom.  Ryan v. Picard and Velvel v. Picard, 567 U.S. 934, 133 S.Ct. 24, 25, 183 L.Ed.2d 675 [2012]).  Beacon Assoc. Mgt. Corp. v. Beacon Assoc. LLC I, 725 F. Supp. 2d 451, 464 (S.D. N.Y.2010), relied on by objectors-appellants, is distinguishable in that it did not involve an equity receivership and the investors realized gains from legitimate investments.

Objectors-appellants' contention that the NIV is inequitable because it does not account for the “time value” of their money is unpersuasive, given that the receiver was seeking to distribute equitably funds that were insufficient to cover each investor's actual losses (see Commodity Futures Trading Commn. v. Walsh, 712 F.3d 735, 754–55 [2d Cir.2013]).  We note that courts have regularly endorsed the NIV in distributing funds to victims of Ponzi schemes and that the New York Attorney General and most of Ascot's investors were in favor of this methodology as the most equitable.

We have considered objectors-appellants' remaining contentions and find them unavailing or academic in light of our determination.