Michael Maffei

Document Type

Research Memorandum

Publication Date




The exposure of Madoff Ponzi scheme, and others like it, will undoubtedly have an impact on the way that bankruptcy courts deal with fraudulent transfers to prime brokers, particularly the degree to which the prime broker on inquiry notice of fraud must act with diligence. Due to the recent economic tumult, the number of bankruptcies is continually growing. Another result of the economic decline is that a large number of investment funds have failed. After these funds failed, many prime brokers discovered that some of the funds were not operating funds at all. They were in fact Ponzi schemes.

As these funds begin to file for bankruptcy, prime brokers may try to avoid severe losses themselves by retaining the value of early fraudulent transfers they received from the funds. Part one of this discussion will present a description of Ponzi schemes and how these schemes make fraudulent transfers to prime brokers. Part two will be an overview of how bankruptcy proceedings deal with fraudulent transfers under section 548 of title 11 of the U.S. Code, 11 U.S.C. §§101-1532 (collectively the Bankruptcy Code). Part three will focus on an exception to fraudulent transfers under section 548(c) of the Code based on good faith. Finally, part four will provide a discussion of a recent case, which when decided provided a less stringent good faith exception to prime brokers but now seems to be an isolated exception to the rule.


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