Access to Madoff Database Denied

Yesterday, Judge Stuart M. Bernstein issued a decision, Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Secs. LLC, Adv. Pro. No. 08-01789 (SMB) (Bankr. S.D.N.Y. Aug. 26, 2019) affirming the order of a Discovery Arbitrator denying the Defendants' motion to compel the Plaintiff under the Securities Investor Protection Act to produce data from the Bernard L. Madoff Investment Securities LLC ("BLMIS") database and produce documents from 13,000 boxes stored in a warehouse. The suit concerns the infamous Ponzi scheme operated by Madoff. The Trustee alleged in this suit that Defendants withdrew more from their accounts than they had deposited.

In another proceeding, the Trustee agreed to make available 4 million documents in a virtual data room. A manual was prepared showing how to search for data. More than 4,000 microfilm reels existed which had not been processed for the database. The Defendants in this case sought records of pre-1992 trading. They rejected the Court's suggestion that they could review an index for this microfilm and select a sample of 20 reels to see if it contained relevant information. The Court declined to simply force the Trustee to hand over the reels. The Defendants filed a motion for sanctions on the basis that the Trustee had failed to turn over trading records as required by two Court orders. The Court warned the Defendants that it would likely lose and might be liable for fees and costs. After this warning the Defendants agreed to the sampling of the microfilms.

The Defendants then submitted a letter to the Discovery Arbitrator seeking access to the complete BLMIS database, as well as access to hard copy records on the basis that Trustee had only loaded data into the database which would support its claims. The Defendants initially asked for a search to be run using 22 terms, and then continuously asked for additional productions, without proposing searches more likely to return relevant documents. As they also failed to support their assertion that the Trustee acted in bad faith, the Discovery Arbitrator refused their request for unfettered access to the database and the boxes in the warehouse.

Judge Bernstein concluded that the Discovery Arbitrator, ". . . reviewed the motion in light of the requirements of Rule 26 and concluded that although the Trustee was exceptionally well-funded, the request to produce the entire BLMIS Database and 13,000 boxes of hard copy documents was disproportionate and burdensome. In essence, the Trustee should not have to bear the cost associated with the Defendants' ever changing and ever growing discovery requests to review 30 million electronic documents in the BLMIS Database or 13,000 boxes of hard copy documents without some evidence to show that BLMIS made some trades for the benefit of the IA customers before 1992." Id. at *34-35.