Big Law Partner Bears the Brunt of Madoff Fraud During Divorce

10950859361151CDPIn 2011 I wrote a story about Steve Simkin, a prominent real estate lawyer at New York mega-firm Paul, Weiss. An unwitting victim of Bernie Madoff’s ponzi scheme, Mr. Simkin signed an agreement with his wife, lawyer Laura Blank in 2006, before Madoff’s massive fraud unravelled, dividing their family assets between the two of them. Part of the deal saw Ms. Blank receive compensation for her one-half interest in Mr. Simkin’s investment portfolio valued at $5.4 million dollars and held by Bernie Madoff.

In 2008 Mr. Simkin realized he was a victim of Madoff’s criminal scheme. The truth was there was no account with Madoff’s company and the monthly statements were forgeries. Simkin filed a lawsuit against his ex-wife seeking to recover the funds he paid her for her share of the portfolio. Simkin’s lawyer argued that Ms. Blank had received a “windfall” on the basis of a “mutual mistake”. He sought a variation of the agreement and reimbursement from his ex-wife.

A Manhattan trial judge didn’t see it that way and tossed out Simkin’s lawsuit. She ruled there had been no mistake, because at the date of the separation agreement the account held funds. The fact the account was later worth nothing was not a “mutual mistake”.

Mr. Simkin immediately appealed and in a 3-2 decision in his favour, the Appeal Court ruled that Simkin’s claim was legitimate and ought to proceed in the lower court.

In a stinging dissent Justice Karla Moskowitz held that the majority decision trampled on years of well-settled law that “a deal is a deal”. She opined that when the agreement was signed the account had value and to adjust the division of assets because one asset had declined in value was “divorced from reality”.

The legal concepts set out in the dissenting opinion, mirror the laws in British Columbia with respect to a Court’s hesitancy to overrule or set aside a separation agreement negotiated by the parties in good faith and with independent legal advice.

The reason why separation agreements should not be easily varied is exemplified by the Simkin case. Another example? If a couple divorced, with the wife retaining the family home and the husband retaining other assets of equal value, it would be ridiculous for the wife to come back two years later and say, “The real estate market has dropped and my home is now only worth half the value it was at the date of the separation agreement, please pay me more money to account for this change in value.”

Of course, Ms. Blank appealed the Court of Appeal decision and in 2011 I made the following prediction:

“I believe at the end of the day, which could be years away, the pain caused by Madoff’s swindle will be suffered only by Mr. Simkin. Do I believe that is fair? Not really, but the law set out in the fourteen page dissent is compelling.”

Sure enough, with all appeals now completed, Mr. Simkin alone bears the burden of Madoff’s fraud, while Ms. Blank is permitted to retain the “overpayment” of $2.7 million.

It is likely that Steve Simkin’s plight will attract little sympathy, given the enormous salaries earned by “biglaw” partners in New York City. Website abovethelaw.com suggests a salary range of $600,000 to $900,000 per annum. Nice work if you can get it!

Mr. Ponzi, Meet Ms. Divorce

They say there is a sucker born every minute and I have to agree. The number of Ponzi schemes that have unravelled in the last several years is remarkable. The wave began with the outrageous scandal that Bernie Madoff created when it was discovered he had defrauded $160 billion from his closest friends, his family, and the public for several decades, while he became a fat-cat at the expense of everyone he encountered, including his son, who later committed suicide.

Since then there has been a parade of white-collar con artists whose greed has also done them in, including Earl Jones from Canada and Lou Perlman and R. Allen Stanford from the United States, to name a few.

It was inevitable that in the world of high-stakes investments the collapse of financial empires would impact the milieu of high net worth divorce. Two such cases have wound their way through the New York divorce courts.

One case involves commodities trader Stephen Walsh who defrauded investors of more than $550 million in a thirteen-year Ponzi scheme. While hundreds of innocent investors lost everything, Mr. Walsh’s wife, Janet Schaberg, cashed in during her divorce from Walsh, which predated the demise of his phony financial firm.

While admitting that Ms. Schaberg was innocent, the U.S. Securities Exchange Commission went after her money alleging that her net worth was largely as a result of the fraud her husband had perpetrated during their marriage. As a result almost $8 million in cash was frozen pending the outcome of the SEC’s lawsuit.

Ms. Schaberg won the lawsuit which enabled her to retain the assets she acquired in her 2009 divorce. The New York Court weighed the competing interests of an innocent spouse of a scam artist against the rightful owners of the funds, who had been taken in by a sophisticated fraud.

In ruling in her favour, the Court compared her with an architect who was paid to build a home for a thief. The architect would not be forced to disgorge the funds he had received from the thief and neither should Ms. Schaberg.

In another New York courtroom this week, the final chapter in the Steve Simkin/Bernie Madoff case was written.

Steve Simkin is a prominent real estate lawyer in New York City with blue-chip law firm Paul, Weiss. He and his wife Laura Blank separated in 2002 after 30 years of marriage and entered into a separation agreement in 2006 that divided equally their significant assets including a home in Scarsdale, an apartment in Manhattan and a stock portfolio managed by Bernard L. Madoff Investment Securities. Simkin’s Madoff account statement showed a value of $5.4 million and he paid his wife about $2.7 million as her fifty percent share of the asset.

To fund the payment to her, he liquidated a portion of his Madoff account, retained the balance and continued to operate this account with Madoff.

In 2008 Mr. Simkin learned he was a victim of Maddof’s criminal scheme and there was no account with Madoff’s company. The statements Simkin relied on were fraudulent. Simkin filed a lawsuit seeking to recover the funds he paid his wife for her share of the portfolio. His lawyer argued that Ms. Blank had received a “windfall” and on the basis of a “mutual mistake” the agreement should be varied and Mr. Simkin should receive reimbursement from his ex-wife.

A Manhattan trial judge disagreed and tossed out Simkin’s lawsuit. She ruled there had been no mistake, as at the date of the separation agreement the account held funds, a portion of which were used to payout Ms. Blank.

On appeal the Court revived Mr. Simkin’s suit ordering a new trial, but this week Judge Victoria Graffeo ruled in Ms. Blank’s favour, unwilling to upset the agreement both parties had entered into in good faith.

The rationale is sound for several reasons, not the least of which is the righteous preclusion of a former spouse with investment or real estate losses from looking to his or her ex to regain assets already divided between them, because of changes in the marketplace.

There is a reason why family lawyers remind their clients that “a deal is a deal”.

Lawdiva aka Georgialee Lang