Madoff Investors Ask Appeals Court to Discard Trustee's Loss Calculation

(Corrects amounts sought by trustee in 13th paragraph.)

Lawyers for victims of Bernard L. Madoff’s Ponzi scheme told an appeals court that the trustee liquidating the con man’s former firm is using the wrong method to determine who should recover part of the money they lost.

The lawyers argued in a hearing today that the law requires the trustee, Irving Picard, to value customer losses based on the final account statements issued by Madoff in November 2008, shortly before his arrest.

“The customers’ account statements are the beginning and the end of the inquiry,” Barry R. Lax, a lawyer for the Madoff investors, told the court.

A decision in the case will determine how much money former investors recover from the Securities Investor Protection Corp., which insures investor losses up to $500,000, and who will get the money Picard recovers through lawsuits and settlements. The decision may affect hundreds of former Madoff investors, including the owners of the New York Mets baseball team.

Picard, who has so far recovered about $10 billion for Madoff victims, has been determining claims by subtracting the amount of money withdrawn from customer accounts from the amount invested. He estimates investors lost about $20 billion of principal in the fraud. The final statements, which reflect phony profits based on trades Madoff never made, showed about $65 billion in customer accounts.

‘Other People’s Money’

David Sheehan, a lawyer representing the trustee, argued that Picard’s method is the only reasonable way to compensate victims of a fraud in which all the claimed profits are actually other people’s money.

“This is a zero-sum game,” Sheehan told the court. “The customer fund is the money that went in.”

Relying on the phony statements issued by Madoff would allow the architect of the fraud to determine the winners and losers among his investors, Sheehan said.

Picard’s position was supported in the hearing by lawyers for the SIPC and the Securities and Exchange Commission.

Madoff, 72, is serving a 150-year sentence in a federal prison in North Carolina after pleading guilty to running the biggest Ponzi scheme in history.

The trustee has sued dozens of banks, feeder funds and investors he claims knew or should have known that Madoff was a fraud. These include the Mets’ owners, whose lawyer, Karen Wagner, argued today against Picard’s “cash-in, cash-out” method for evaluating claims.

Mario Cuomo

Among the spectators at today’s 1 1/2-hour hearing was former New York governor Mario Cuomo, who was appointed by the bankruptcy court to act as mediator between Picard and the Mets’ owners, which include team chairman Fred Wilpon and president Saul Katz.

Picard has sued for the return of $300 million in alleged false profits from the fraud. He is seeking an additional $700 million in principal and claims that Wilpon, Katz and a group of related investors turned a blind eye to “red flags” that should have alerted them to the fraud.

“I think this is very complex, very big -- a lot of interests involved,” Cuomo said after the hearing. He said he hopes he can help Picard and the Mets’ owners settle their dispute.

The case is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC, 08-01789, U.S. Bankruptcy Court, Southern District of New York Manhattan).

To contact the reporter on this story: Bob Van Voris in New York at rvanvoris@bloomberg.net.

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net.

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