Two hedge funds filed a lawsuit accusing a Deutsche Bank AG unit of reneging on a $1 billion deal to buy their claims for losses in Bernard L. Madoff's Ponzi scheme.
The suit, filed in a New York federal court by Kingate Global Fund Ltd. and Kingate Euro Fund Ltd., is a sign of the negative consequences of recent court decisions against the trustee overseeing the bankruptcy of Mr. Madoff's firm.
Courts have handed down recently a series of unfavorable decisions to Irving Picard that limit his ability to further recover money. Those decisions have pushed down the value of Madoff-related claims to 60 cents or less on the dollar, according to the lawsuit. Such claims traded near 75 cents about six months ago.
The lawsuit filed by Kingate alleges that Deutsche Bank Securities Inc. has been dragging its feet since August 24, when both parties signed a letter confirming terms of its deal to purchase Madoff claims from Kingate.
Deutsche Bank "is going back on its written binding commitment to purchase the Kingate Funds' claims because it does not want to pay what it now views, with the benefit of hindsight, as too high a price," according to the complaint filed by Richard I. Werder Jr., a lawyer for the Kingate funds. The value of the claims is down by more than $90 million since late August, the hedge funds alleged.
The lawsuit seeks a judgment stating that the confirmation letter is binding and that Deutsche Bank hasn't negotiated in good faith. Deutsche Bank has said it will finalize the purchase at the original price but only if it gets written assurances that it will be eligible for payouts from a pot of nearly $3 billion in forfeitures of money and property related to the case recovered by federal prosecutors in Manhattan, according to people familiar with the matter.
That is in addition to an $8.7 billion pot recovered by Mr. Picard from people who took profits from phony investments.
In a statement, Deutsche Bank said it "will purchase Kingate's claim if both parties can finalize mutually acceptable documentation." William Tacon, a liquidator of the Kingate funds, declined to comment.
Mr. Picard has been appointed special master to distribute the money collected by prosecutors, but the Justice Department hasn't determined exactly how or to whom the funds will be given out. A spokeswoman for Mr. Picard said he couldn't comment on pending litigation.
The Kingate funds fed billions of dollars to Mr. Madoff before his Ponzi scheme collapsed three years ago. Under the deal with Deutsche Bank, it would purchase the funds' combined claim of about $1.6 billion for a cost of about $1.1 billion, or about 66 cents on the dollar, according to the confirmation letter. The letter said the deal was "firm, irrevocable and binding," but also that it was subject to negotiation and execution of a purchase and sale agreement, which is where the transaction has stalled.
One ruling in September struck down most of Mr. Picard's $1 billion lawsuit against the owners of the New York Mets and their associates. That ruling could have implications for Mr. Picard's ability to collect billions of dollars from others he has sued, the trustee's aides have said.
The Kingate funds have also been sued by Mr. Picard for allegedly ignoring signs of the Ponzi scheme. The Deutsche Bank deal would allow the funds to complete a legal settlement with Mr. Picard and distribute some money to its own investors, the Kingate lawsuit says.
read more: Olympus Wealth Management
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