Recovery for Bernard Madoff customers bolstered by Citigroup ruling, trustee’s lawyer says

A U.S. appeals court said the trustee liquidating Bernard Madoff’s firm can pursue a $343.1 million clawback lawsuit against Citigroup Inc (C.N), a decision that could help the late swindler’s customers recover close to the estimated $17.5 billion they lost in his Ponzi scheme.

The 2nd U.S. Circuit Court of Appeals in Manhattan ruled on Monday that lower court judges incorrectly required the trustee Irving Picard to prove Citigroup lacked good faith by being “willfully blind” to “red flags” suggesting a high probability of fraud.

It said the correct standard was whether the New York-based bank knew “suspicious facts” about Madoff that would have caused a reasonable person to follow up.

Seanna Brown, a lawyer representing Picard, in a statement called the decision an “important victory” for Madoff victims that could help the trustee recover $3.75 billion, on top of nearly $14.5 billion he has already recovered.

Brown said the decision affected about 90 lawsuits, and should help bring victims “as close as possible to recovering 100% of their losses.”

Citigroup declined to comment. Brown and Picard are partners at the law firm Baker & Hostetler.

The $343.1 million represented money that Citigroup received between 2005 and 2008 from a Madoff “feeder fund,” Rye Select Broad Market Prime Fund LP, that had borrowed from the bank to invest with Bernard L. Madoff Investment Securities LLC.

Picard said Citigroup accepted that money despite internal suspicions that Madoff’s trading activity and investment returns were a sham.

U.S. Bankruptcy Judge Stuart Bernstein in Manhattan dismissed Picard’s case after another judge, U.S. District Judge Jed Rakoff, imposed the willful blindness standard.

But in Monday’s 3-0 decision, Circuit Judge Richard Wesley said the plain meaning of good faith in the U.S. Bankruptcy Code required that Citigroup be only on “inquiry notice” of Madoff’s fraud.

The appeals court also revived similar clawback lawsuits against two other firms.

Madoff died on April 14 at age 82 in prison, where he was serving a 150-year sentence.