A group of Bernard Madoff’s victims won permission to appeal directly to a federal appeals court a bankruptcy ruling barring them from using the length of time they invested with the con man to add interest to their claims.
The victims “satisfied the criteria” for a direct appeal that skips over the district court, where appeals of bankruptcy judge’s rulings usually go first, the U.S. Court of Appeals in New York ruled yesterday. A hearing date wasn’t set.
“This is a very important legal issue because, clearly, people do not invest in the stock market for decades in the expectation that their investments will not appreciate,” Helen Davis Chaitman, a lawyer for 1,648 of Madoff’s former clients, said today in an e-mailed comment about the rapid appeal.
The victims seek a larger share of about $1.4 billion in cash reserves set aside for the dispute by Irving Picard, the trustee liquidating Madoff’s firm to repay thousands of investors who lost $17 billion in principal when the world’s biggest Ponzi scheme collapsed on Dec. 11, 2008.
Picard, who backed an expedited appeal to speed up the process, has recovered more than $10 billion through lawsuits and settlements since Madoff’s arrest almost five years ago. Picard and his team have distributed $4.89 billion to victims so far, according to his website.
U.S. Bankruptcy Judge Burton R. Lifland’s ruling in September said using such “time-based” calculations might be unfair to creditors who are at the end of the line to receive payouts and could give a windfall to claims by traders who weren’t victims of Madoff’s Ponzi scheme.
Adding interest to claims would “likely have significant unintended consequences, including favoring certain investors who have already recovered their principal investments at the expense of other investors who have yet to recoup their principal,” Lifland, who died from pneumonia this month at the age of 84, said in his ruling. Several cases related to the fraud were reassigned to another judge.
Picard previously won an appeals court ruling in 2011 affirming his method of calculating losses based on the cash invested minus cash taken out, instead of the amount on customers’ final account statements, which included fake profits that accumulated over years’ worth of fake trading.
In the interest dispute, some claimants argued the time-based damages took into consideration “the economic reality of inflation” and didn’t punish earlier customers “in an arbitrary fashion,” according to the ruling.
Picard’s spokeswoman, Amanda Remus, declined to comment on the decision.
Madoff, 75, is serving a 150-year sentence in a federal prison in North Carolina. Five of his former aides are on trial in federal court in Manhattan, accused of creating fake trading documents and account statements to trick customers and regulators for years, and getting rich in the process.
At the trial yesterday, a forensic accountant with the Federal Bureau of Investigation testified that defendant Annette Bongiorno, the Madoff aide who ran his investment advisory business, withdrew $13.6 million more from the con man’s firm than she deposited since she opened her first account with $1,000 in 1975.
Jason Wake, the accountant, told jurors that Bongiorno, who was hired by Madoff in 1968 when she was 19, ramped up her withdrawals from seven accounts linked to her and her husband in the years before Madoff’s arrest in 2008.
The bankruptcy case is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC, 08-ap-01789, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
The criminal case is U.S. v. O’Hara, 10-cr-00228, U.S. District Court, Southern District of New York (Manhattan).
To contact the reporter on this story: Erik Larson in New York at email@example.com