Bankruptcy Litigation

Prime Brokers May Be Liable for Customers Fraudulent Transfer

By: Michael Maffei

St. John's Law Student

American Bankruptcy Institute Law Review Staff


In a good news, bad news decision for prime brokers, the District Court in In re Manhattan Investment Fund v. Gredd


held that a prime broker is an initial transferee of funds held in a customer’s margin account, but recognized a “robust” good faith defense to transferee liability.  In this appeal from an award of summary judgment,


Bear Sterns had receive approximately $141 million to cover margin calls for a hedge fund that, in reality, was a “Ponzi” scheme.  In a holding that spells trouble for prime brokers, the Court rejected the argument that a prime broker is a “mere conduit” and lacks “dominion and control” over the funds in a margin account.  Applying the Second Circuit’s “nuanced” approach, the Court rejects the narrow view that a party must have unfettered control over funds in order to be an initial transferee.


  Since Bear Sterns could use the margin funds to protect itself against possible losses, it did not qualify as a mere conduit.  Further, the discretionary authority given it as prime broker to close out positions, which was standard in the industry, was sufficient “control” to trigger transferee status.