Bass, Berry & Sims attorney Chris Lazarini discussed a case in which a pension fund, a "net winner" in the Madoff Ponzi scheme, filed an ERISA action against its investment adviser seeking to recover "lost opportunity" damages from fictitious alternative investments. The court dismissed the claims, finding plaintiff lacked standing because it suffered no cognizable injuries. 

Chris provided the analysis for Securities Litigation Commentator (SLC). The full text of the analysis is below and used with permission from the publication.

Trustees of the Upstate New York Engineers Pension Fund vs. Ivy Asset Management, No. 15-3124 (2nd Cir., 12/8/16) 

A plaintiff who does not have a legally cognizable injury lacks standing to bring an ERISA action. 

Plaintiff is a true "net winner" in Bernie Madoff's Ponzi scheme. Acting through Defendant, its investment advisor, Plaintiff opened a Madoff account in 1990. In 1998, Plaintiff began withdrawing funds from its Madoff account after Defendant concluded that Madoff's investment strategy was incoherent and his outsized returns were inconsistent with publicly available information. By the end of 2005, Plaintiff had withdrawn $33 million in "profits" from its Madoff account.

When Madoff's fraud was exposed in 2008, Plaintiff relied on the running of the statute of limitations to protect its outsized "profits" against the bankruptcy trustee's claw-back action. Seeking even more than this windfall, Plaintiff brought this ERISA action, alleging that Defendant should have closed Plaintiff's Madoff account in 1998, re-investing the then $36 million reported balance (including $31 million in "profits") elsewhere. Plaintiff sought to recover the "lost opportunity" of the fictitious alternative investments, performance fees paid to Defendant based on the reported Madoff balances, and the attorneys' fees and costs it incurred in defending against the bankruptcy trustee's claims.

Affirming the district court's dismissal, the Court of Appeals holds that Plaintiff lacks standing to bring its claims because it suffered no cognizable injury. The measure of Plaintiff's alleged loss is not based on other investors' money it could have received from Madoff. The "universally accepted rule" is that innocent investors may retain distributions from a Ponzi scheme to the extent of their investments, while distributions exceeding their investments (i.e., monies taken from other victims of the scheme) are fraudulent conveyances. No interest would be served by giving effect to Madoff's fraud, although the Court acknowledges that the statute of limitations would have allowed Plaintiff to keep the entire amount had the account been closed in 1998, just as it allowed Plaintiff to keep the $33 million in "profits" it actually took.

Here, there is no cognizable loss based on the amount of Plaintiff's actual investment with Madoff, some $6 million. Had $6 million been withdrawn from Madoff and invested elsewhere in 1998, the Court explains, there is no plausible scenario under which Plaintiff would have enjoyed returns in excess of the $33 million in "profits" Plaintiff pocketed. Even an astronomical 25% annual return from 1998 to 2005 would have left Plaintiff $11 million short of the $33 million mark. It is likewise inconceivable that the performance fees paid Defendant and attorneys' fees and costs associated with the claw-back action exceed Plaintiff's "profits." Absent an injury in fact, the Court concludes, Plaintiff lacks Article III standing to bring the claim.