Three Years after Madoff’s Arrest

Three years after Bernard Madoff’s arrest, about $11 billion of the $18 billion in estimated losses has been recovered by Irving Pickard, the Madoff trustee.

In 2011, Picard faced legal challenges. First he obtained a court approval of a $7.2 billion settlement by the estate of Jeffry Picower. Picower was a Wall Street investor who profited well from Madoff accounts. In 2012, Picard’s priority will be to appeal lower court rulings that could reduce any future recovery by about $11 billion. The lower court rulings involved three major issues:

• Picard’s legal right to sue Madoff’s bank or other third parties on behalf of defrauded investors,
• whether there is a safe harbor to protect investors from having to turn over profits made prior to the collapse of the Ponzi scheme; and
• proof Picard needs to establish that sophisticated investors were willfully blind to the fraud.

The third issue has been highlighted in a NY case involving the New York Mets owners, presided by Judge Jed S. Rakoff of Federal District Court in Manhattan.

While Madoff served a 150-year sentence in a federal prison in Butner, NC, Picard sustained in 2011 congressional and public criticism on his claims formula. In approving the 2,425 out of 16,519 claims filed, Picard evaluated just the net figures, denying claims by investors who eventually withdrew more money than they invested with Madoff. A federal appeals court approved Picard’s formula on who should be paid first. The net winners argued their claims should be based on the last account statements they received prior to Madoff’s arrest. These statements showed the investors were owed a total of $64.8 billion.

In February 2011, Rep. Scott Garret (R-NJ) introduced a bill requiring the trustee in a brokerage-firm bankruptcy to accept claims on the final account statements, rather than the net cash lost. The bill also proscribed the trustee from recovering the fictional profits the investor received, according to “The Lasting Shadow of Bernie Madoff,” The New York Times, December 10, 2011. The bill would also stop a trustee from suing to recover fictional profits from net winner investors even if the brokerage firm’s bankruptcy was a result of a Ponzi scheme, where the profits were really cash the schemers stole from someone else.

During summer 2011, Garrett requested the Government Accountability Office to investigate how Picard handled the Madoff liquidation, which is still ongoing.

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