Court: Lawsuit Against Lawyer Who Represented Madoff Winners And Losers Can Proceed

“Ms. Chaitman represented both net winners and net losers in a zero-sum game; the more money collected from some of her clients (the net winners), the more available to be distributed to her other clients (the net losers). Ms. Chaitman’s clients, therefore, were in direct conflict with each other.  To make matters worse, Ms. Chaitman herself is a net loser, which means she personally stands to receive money taken from her net winner clients. This conflict cannot be waived.”

In the immediate aftermath of Bernard Madoff’s massive Ponzi scheme, one that resulted in at least $17 billion of losses to thousands of investors, many of those investors turned to an outspoken lawyer who promised to champion their unfortunate situation and resist the efforts of the court-appointed trustee seeking to recoup funds.  Many were drawn to Helen Chaitman’s fiery resistance to trustee Irving Picard’s clawback efforts, which would ultimately result in many later retaining her to defend the trustee’s lawsuits seeking return of the fictitious profits that had been the sustenance of Madoff’s fraud.  A court recently ruled that those same victims can proceed with a class-action lawsuit on allegations that Chaitman had irreconcilable conflicts preventing her from representing various classes of Madoff victims.

According to those victims who had been fortunate enough to withdraw more money than they put into Madoff’s scheme, known as “net winners,” their self-proclaimed “savior” Chairman had an inherent conflict of interest all the while she was supposedly advocating for those net winners - Chaitman herself was a “net loser,” having invested in Madoff’s scheme and failed to recoup all of her original investment before the scheme’s collapse.  Thus, as those victims contended in a class action against Chaitman and her former and current law firms, Chaitman’s efforts in representing those “net winners” and eventually resolving cases by repaying some (or all) of the winners’ false profits would place more and more funds into the trustee’s estate for eventual distribution to net losers - including herself - all the while enriching her with millions of dollars in attorney’s fees for her efforts.  Those investors also claimed that Chaitman’s efforts representing a third class of Madoff victims, the so-called “early investors” who sought to retain their realized profits out of the bankruptcy estate because Madoff’s fraud had not yet started, were in conflict to both the net losers and net winners.

Chaitman allegedly represented those “net winner” and “early investor” victims on an hourly-fee basis while representing the “net loser” victims on a contingency fee basis.  Of particular note, those “net loser” victims would eventually receive significant payments from the bankruptcy trustee and advances by the Securities Investor Protection Corporation which, in many cases, resulted in 100% recoveries for victims with investments under a certain amount. While the exact nature of those contingency fee agreements for “net losers” is unclear, it is interesting to theorize exactly what services besides providing general information and assisting investors with filing proof of claim forms (which are regularly submitted by Ponzi scheme victims without the assistance of counsel) might otherwise entitle Chaitman to a percentage of what could now be 100% recoveries for many investors.  For example, a 30% contingency fee for a victim who lost (and ultimately recovered) $1 million would yield a $300,000 fee.

As to her representation of “net winners,” an Amended Complaint accused Chaitman of continually advocating a strategy of “full-scale litigation” given Trustee Irving Picard’s goal to “make this litigation as expensive and time-consuming as possible because his only goal is to enrich himself at the expense of innocent customers….Picard will not settle for less than [the full two-year exposure].”  As part of this strategy, the Amended Complaint cites a request from Chaitman to her “net winner” clients to advance a $15,000 retainer per case in 2016.  The Amended Complaint alleged that at least one investor was, contrary to Chaitman’s claims, able to settle their claims “for a fraction of its full two-year exposure.”

In late 2018, Chaitman and her current and former law firms sought to dismiss the investors’ claims on grounds that the lawsuit failed to satisfy the numerosity (over 100 potential class members) and amount-in-controversy (over $5 million) requirements imposed on class-action lawsuits under the Class Action Fairness Act.  In July 2019, the Southern District of New York entered an Order affirming a Report and Recommendation which found that the lawsuit satisfied both requirements.  As to the numerosity requirement, the Court found that a June 2012 invoice provided by plaintiffs showing each “net winner” being billed 1/109th of Chaitman’s time spent working on clawback matters was uncontested and also highlighted that Chaitman’s website had claimed she represented over 1,600 investors.  

As to the $5 million amount-in-controversy requirements, the Court first noted the amount of fees each law firm contended it was paid.  Chaitman’s former firm acknowledged receiving $3.2 million in fees during the relevant period while her current firm indicated it had collected over $2.7 million during that same period.  While the Chairman Defendants contended that the amounts could not be aggregated to meet the $5 million requirement, the Court found that CAFA “explicitly” provided for aggregation of the plaintiffs’ claims and that such an interpretation was consistent with “the overall spirit of CAFA.”

At recently as late 2018, Chaitman continued to be involved in litigation with Trustee Picard over his clawback efforts.  Bloomberg reported in September 2018 that “Chaitman has lately been fighting in court for access to Picard’s massive database of trading records and other documents seized from Madoff’s firm to advance a fringe theory that the fraud wasn’t technically a Ponzi scheme.”  That same article referenced Chaitman’s efforts to dismiss an earlier case brought by the lead plaintiff in the class-action, including her position that the lead plaintiff “sued in a bid for press attention after Chaitman sued him for unpaid fees in New Jersey” and Chaitman’s belief that “the suit should be tossed because it’ll never get class-action status.”

The case will now be allowed to proceed to discovery given the Court’s decision.

A copy of the Order is available here.