U.S. Settles Lawsuit Alleging That Investment Firm Fraudulently Obtained Payments From The Madoff Victim Fund

 

Defendant Admits Causing Inaccurate Submissions to the Fund and Agrees to Pay $2.5 Million

 Damian Williams, the United States Attorney for the Southern District of New York, and Richard C. Breeden, Special Master of the Madoff Victim Fund (“MVF”), announced today that the United States has filed and settled a civil fraud lawsuit against FULCRUM CAPITAL PARTNERS LLC (“FULCRUM”), an investment firm based in Austin, Texas, alleging that FULCRUM fraudulently obtained payments from the MVF, an entity created by the Department of Justice (“DOJ”) to distribute funds collected by the United States through civil and criminal asset forfeiture to victims of the fraud perpetrated by Bernard L. Madoff.  Specifically, the United States alleges that FULCRUM, in violation of the False Claims Act, purchased recovery rights from various Madoff fraud victims who had submitted claims to the MVF and required the Madoff fraud victims to conceal these transactions from the MVF.  As a result, FULCRUM caused the MVF to make inflated payouts to the victims, which they paid over to FULCRUM.  Under the settlement, submitted today to U.S. District Judge Valerie E. Caproni for review and approval, FULCRUM will pay $2,511,084 to the United States.  FULCRUM also made extensive factual admissions regarding its conduct, including that it caused inaccurate statements to be submitted to the MVF and received amounts from the MVF to which FULCRUM was not entitled.

U.S. Attorney Damian Williams said: “The Madoff Victim Fund was created to compensate victims who suffered unreimbursed losses from the massive fraud perpetrated by Bernard Madoff.  The MVF’s ability to make fair and accurate distributions to Madoff victims depends on claimants’ compliance with MVF reporting requirements, including truthful disclosure of all Madoff-related recoveries received from any other source.  Fulcrum obtained a fraudulent windfall from the MVF by purchasing recovery rights from Madoff fraud victims, then compelling them to conceal the sales proceeds from the MVF and transfer the resulting inflated MVF payments to Fulcrum.  This Office will not tolerate lying to the MVF and will continue to pursue and hold accountable those who would use deceptive practices to obtain MVF funds.” 

MVF Special Master Richard C. Breeden said: “The defendant Fulcrum is a claim buying financial firm that never lost a penny from Madoff’s conduct.  After secretively buying claims from real victims, Fulcrum caused others to conceal information from the Madoff Victim Fund with the objective of gaining greater payments for itself.  The inevitable consequence of orchestrating false reports to MVF was diminishing the help that we could be provided to real fraud victims.  We applaud the SDNY U.S. Attorney’s Office for recovering $2.5 million that the defendants should never have received.  Of equal importance is the message that lying to MVF and concealing recoveries is an illegal act that will be prosecuted vigorously.”

From as early as the 1970s through December 2008, Bernard L. Madoff perpetrated the largest Ponzi scheme in history, defrauding thousands of victims of billions of dollars through Bernard L. Madoff Investment Securities LLC (“Madoff Securities”) (the “Madoff Fraud”).  The U.S. Attorney’s Office for the Southern District of New York has recovered over $9 billion related to the Madoff Fraud through civil and criminal asset forfeitures.  In 2013, the DOJ created the MVF to distribute to victims of the Madoff Fraud certain of the forfeited funds through a process called remission.     

As alleged in the Complaint filed in Manhattan federal court:

From at least October 2016 through October 2022, FULCRUM violated the False Claims Act by causing the submission of false claims and statements to the MVF that failed to disclose payments certain MVF claimants had received from FULCRUM.  As a result of this scheme, FULCRUM fraudulently received payments from the MVF to which it was not entitled. 

FULCRUM is an investment firm that specializes in trading distressed assets, including Madoff Securities feeder fund shares and attendant rights.  One Madoff Securities feeder fund whose underlying investors suffered losses from the Madoff Fraud was the Luxembourg-based Luxalpha SICAV Fund (“Luxalpha”).  From 2014 to 2019, FULCRUM purchased Luxalpha shares and attendant Madoff-related recovery rights from three investor groups: (i) Carac, a public pension fund based in France; (ii) a group of investors in Fondaco Absolute Return, a fund based in Italy (the “Fondaco Investors”); and (iii) a group of related individual investors based in France (the “Planckes”). 

Carac, the Fondaco Investors, and the Planckes (the “Claimants”) had previously filed claims with the MVF seeking remission payments for losses they claimed to have incurred as a result of their investments in Madoff Securities through Luxalpha.  FULCRUM entered into a series of Purchase and Sale Agreements (“PSAs”) with Carac, one of the Fondaco Investors (a foundation called Compagnia di San Paolo (“CSP”)), and the Planckes, pursuant to which FULCRUM bought their rights to receive remission payments from the MVF.  In particular, under the PSAs, Carac, CSP, and the Planckes each agreed to deliver all payments received from the MVF to FULCRUM; permit FULCRUM to act in each of their names, places, and steads with respect to the MVF; and take all actions requested by FULCRUM regarding the MVF. 

FULCRUM was aware that the MVF requires all claimants to disclose collateral recoveries received from any other source, including proceeds from the sale of MVF recovery rights.  The MVF issued multiple Collateral Recovery Update (“CRU”) Notices to each of the Claimants, requiring them to report all collateral recoveries.  FULCRUM instructed Carac, CSP, and the Planckes to fraudulently conceal in their CRU responses the payments they had received from FULCRUM for the sale of their Luxalpha shares and rights to remission payments from the MVF.  The MVF was required to reduce the Claimants’ remission payments by the amount of their collateral recoveries to prevent the Claimants from receiving duplicative recoveries.  As a result of FULCRUM’s fraudulent scheme, the MVF made inflated remission payments to the Claimants.  Carac, CSP, and the Planckes then transferred these amounts to FULCRUM. 

 As part of the settlement, FULCRUM made extensive admissions of conduct alleged in the United States’ Complaint, including the following:

• FULCRUM knew that the MVF remission process was governed by remission regulations and the MVF’s Plan of Distribution, pursuant to which DOJ requires that remission payments be reduced by the victims’ collateral recoveries, including any payments victims received, directly or indirectly, from any source for the victims’ Madoff losses.  Furthermore, FULCRUM knew that the MVF issued multiple CRU Notices to each of the Claimants requiring them to disclose any recoveries they received from any source other than the MVF, including proceeds received from the sale or assignment of Madoff feeder fund shares and rights and from the purported sale or assignment of MVF remission claims.

• Despite the stated requirement that victims disclose all collateral recoveries they received, FULCRUM instructed or otherwise caused the Claimants to submit inaccurate CRU responses to the MVF that failed fully to disclose the amounts the Claimants had received from selling their Luxalpha shares and related rights and remission claims to FULCRUM.

• Under their PSAs with FULCRUM, Carac, CSP, and the Planckes agreed that they would retain no beneficial interest in any distributions they received from the MVF, that they would hold any such distributions as agents of FULCRUM, and that they would deliver any such distributions to FULCRUM within five days of receipt.  Carac, CSP, and the Planckes further agreed to grant FULCRUM irrevocable power of attorney with respect to the remission claims, to deliver all correspondence they received from the MVF to FULCRUM, and take all actions requested by FULCRUM to effectuate the terms of the PSAs. 

• In September 2017 and May 2019, respectively, pursuant to the PSA and at FULCRUM’s behest, Carac submitted two CRU responses to the MVF that inaccurately represented that Carac had received no collateral recoveries, when, in fact, it had received significant sales proceeds from FULCRUM.

• From February 2017 through July 2019, pursuant to the PSA and at FULCRUM’s behest, CSP submitted four CRU responses to the MVF that inaccurately failed to disclose the full amount that CSP had received from FULCRUM for its Luxalpha shares and related rights.  CSP stated that it had sold its remission claim to an unidentified secondary market player for a specified amount, but this amount reflected only the amount CSP received from FULCRUM for the purported sale of its remission rights rather than the total proceeds CSP had received from FULCRUM for the sale of its Luxalpha shares and related rights.  During the same time period, the other Fondaco Investors likewise submitted 28 documents to the MVF that inaccurately represented that these investors had received no collateral recoveries, when, in fact, they had received significant sales proceeds from FULCRUM.

• From August 2019 through October 2020, pursuant to the PSA, and at FULCRUM’s behest, the Planckes submitted 20 CRU responses to the MVF that inaccurately represented that the Planckes had received no collateral recoveries other than those they received from a financial intermediary in connection with a litigation settlement, when in fact they had received significant additional proceeds from FULCRUM for the sale of their Luxalpha shares and related rights.

• As a result of FULCRUM instructing or otherwise causing the Claimants to submit inaccurate collateral recovery information as described above, the MVF distributed remission payments to the Claimants that they were not entitled to receive.  Pursuant to the PSA, Carac, CSP, and the Planckes then transferred the amounts they had improperly received from the MVF to FULCRUM.

FULCRUM will pay $2,511,084 to the United States under the settlement.  In addition, FULCRUM agreed that it and the Claimants are not entitled to receive any amounts from the MVF in the future, and that FULCRUM shall not seek to obtain, on behalf of itself or the Claimants, any further amounts from the MVF.  In connection with the filing of the lawsuit and the settlement, the Government joined a private whistleblower lawsuit that had been filed under seal pursuant to the False Claims Act.

Mr. Williams thanked the Federal Bureau of Investigation and the MVF for their assistance with the case.