Citigroup Inc. did not intentionally turn a blind eye to Bernie Madoff's massive Ponzi scheme, despite recognizing early warning signs through its dealings with a feeder fund, a Manhattan bankruptcy judge said Friday.

The ruling, from U.S. Bankruptcy Judge Stuart M. Bernstein of the Southern District of New York, came in a clawback suit from the trustee of Madoff's estate to recover $343 million in transfers made to the the New York-based bank.

Trustee Irving Picard alleged in the lawsuit that Citi was aware of "red flags" with Bernard L. Madoff Investment Securities as early as 2005 but that Citi passed off its exposure to other banks, just months before the epic fraud was revealed. Madoff was arrested in 2008 and later sentenced to 150 years in prison for orchestrating the multibillion-dollar Ponzi scheme, considered to be the largest and longest-running in U.S. history.

The suit sought to reclaim the funds under a provision of U.S. bankruptcy law that allows a trustee to target fraudulent transfers in order to repay creditors of a bankruptcy estate. Picard, a partner with Baker & Hostetler, had moved to amend his December 2010 complaint to allege bad faith on the part of Citi in a $300 million loan it made to Prime Fund, which is part of Tremont Capital Management Inc., a so-called feeder fund for Madoff.

The trustee had argued that instead of investigating its concerns about Madoff, Citi obtained an indemnification agreement and then refused to act on its suspicions, despite mounting evidence of fraud.

But Bernstein held Friday that an amended filing would not survive a motion to dismiss because Picard was unable to prove that Citi had a "subjective belief in the high probability" that BLMIS was running a Ponzi scheme when the bank made its loan to Prime Fund in June 2005.

Critically, Bernstein wrote, Citi had concerns based on the "perceived risk" that BLMIS could steal customer assets, but the complaint failed to allege that it knew at the time that Madoff was actually ripping off investors.

While Citi may have been "reckless and deliberately indifferent" to the risk Madoff presented, its actions did not rise to the level of "willful blindness" necessary to claw back the funds.

"In light of the foregoing," Bernstein wrote, "the court concludes that the [proposed amended complaint] fails to allege anything more than that the defendants assumed the 'remote' risk that BLMIS was not trading securities and might be a fraud and at most."

"Under the Trustee's formulation, a person who acts in the face of a known risk he cannot confirm despite his best efforts is willfully blind. However, the defendant that is deliberately indifferent to a known risk and acts anyway is not willfully blind," he said.

Attorneys for both sides did not return calls Friday afternoon seeking comment on the ruling.

Picard was represented by David J. Sheehan, Seanna R. Brown, Matthew D. Feil, Andres A. Munoz and Chardaie C. Charlemagne of Baker & Hostetler.

Citi was represented by Carmine D. Boccuzzi Jr. and Pascale Bibi of Cleary Gottlieb Steen & Hamilton.

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