Madoff Customer Pool May Grow to $7.3 Billion by July 16

Bernie Madoff
Bernard Madoff, founder of Bernard L. Madoff Investment Securities LLC, leaves federal court in New York. Photographer: Jin Lee/Bloomberg

The liquidator of Bernard Madoff’s brokerage may have $5 billion more by next month to increase a planned payout from a $2.3 billion fund for victims of the Ponzi scheme if no further court challenges are filed.

Madoff trustee Irving Picard announced the possible increase in a statement after the U.S. Supreme Court yesterday refused to hear an appeal by investors seeking compensation for lost profit. That decision frees most of a $2.3 billion customer fund by reducing the scheme’s calculated total to about $17 billion covering only lost investments and excluding so-called fake profit that would have raised the total to $57 billion.

Another $5 billion may be available from a 2010 settlement with Jeffry Picower’s estate if that deal isn’t challenged again by July 16, Picard said.

Adele Fox, the main challenger to the Picower deal, doesn’t plan another appeal to the key court ruling that restricted Picard’s access to the $5 billion, said Fox’s lawyer, Jim Beasley.

“Picard gets the money,” Beasley said yesterday in a phone interview. “I don’t know the time frame.”

Picard, who so far has paid the con man’s investors $333 million in 3 1/2 years, said yesterday he would ask a judge to approve a second distribution “within an expedited time frame.”

Escrow Agent

Most of the $9 billion that Picard has won in settlements, including Picower’s $5 billion, has been unavailable for disbursement because of court challenges. Picard has set aside $2.3 billion for customers, not including the Picower money. The escrow agent holding the money forfeited by Picower will release it if shown a final non-appealable court order upholding the deal, according to court filings by Picard that detail the 2010 settlement.

Picower, one of the largest of Madoff’s investors, may have suspected the con man was running a Ponzi scheme, according to Picard’s lawsuit against him. Picower drowned in 2009, and his estate forfeited $2.2 billion to the U.S. and $5 billion to Picard. Fox, after losing her latest bid to reverse the forfeiture, had until July 16 to ask the Supreme Court to let her appeal again. She won’t make the request, Beasley said.

In a separate case, Fox, acting for herself and others who have little prospect of getting paid by Picard, will continue to challenge the Picower deal, which is the trustee’s biggest settlement with a former Madoff investor, Beasley said. If successful, she may still get some of the Picower money back, he said.

“These are people who suffered real damages and have valid claims,” Beasley said. “Picard has determined that they shouldn’t get paid.”

Suing Investors

In April, Fox appealed a U.S. District Court ruling that affirmed the Picower settlement. Like other investors who took more money out of the con man’s brokerage than they put in, she wants the right to sue allegedly fraudulent Madoff investors for compensation. Picard’s settlements bar them from doing that.

Picard has held back on distributing more money from the $2.3 billion fund for the con man’s customers, not knowing if he must pay 4 cents on the dollar each to investors who lost $57 billion including profits, or about 13 cents to those who lost $17 billion of principal. The Supreme Court action yesterday settled that question.

Sympathetic Trustee

“I think the trustee is very sympathetic to investors and it will be at least a dime,” or a total of $1.8 billion, that goes to investors from the current customer fund, said Joseph Sarachek, managing director of claims trading at CRT Capital Group LLC, which buys and sells distressed debt, including the Madoff brokerage’s.

Larry Velvel and other investors -- including the owners of the New York Mets baseball team -- had asked the top court for a hearing after federal appeals judges in New York said in August it would be “absurd” to treat fictitious paper profits as real, upholding a lower court ruling. The investors argued that securities laws require Picard to use their account statements to calculate their losses, and compensate them accordingly.

The Mets owners dropped their appeal to the Supreme Court after settling a lawsuit against them by Picard.

Before conferring June 21 on whether to hear the appeal, the Supreme Court justices asked the U.S. Securities and Exchange Commission to file papers on whether Picard is using the right formula to compensate investors.

The SEC said he was. Moreover, the subject wasn’t of great importance to the nation, and doesn’t justify attention from the U.S.’s top court, the SEC said. In the past 18 years, only seven Ponzi schemes have been liquidated, it said.

SEC Filing

“Petitioners thus do not present an issue of recurring significance warranting this court’s review,” the SEC said in a May filing, made on its behalf by the U.S. Solicitor General, who supervises government cases before the high court.

How Ponzi investors should be paid “turns on the details of a particular fraudulent scheme,” with little application for the majority of investors, the SEC said.

“Purported increases in the value of customers’ accounts, moreover, were entirely fictitious,” validating the lower court rulings, it said.

Picard’s formula for compensating victims is to figure their loss of principal, then allot them a share of the money he says he has raised by suing or settling with investors who allegedly knew of the fraud. Investors with net gains, who took out more money than they put in, have to wait until net losers get paid in full.

Thousand Lawsuits

The trustee, who filed more than 1,000 lawsuits claiming $100 billion, said last year he hoped to raise enough money to pay all investors back in full, including those with false profits on the account statements. Since then, federal judges led by U.S. District Judge Jed Rakoff in New York have dismissed about $90 billion of Picard’s claims.

Picard and his law firm have charged $273 million for their Madoff work so far. Madoff is in prison, serving a 150-year sentence for fraud.

In a separate matter, New York state settled a lawsuit for $410 million with J. Ezra Merkin over claims that Merkin funds secretly placed client money with Madoff.

The agreement provides $405 million to compensate investors and $5 million for the state, according to a June 24 statement by the office of New York Attorney General Eric Schneiderman. In the case, filed in 2009 by Schneiderman’s predecessor, Andrew Cuomo, the state claimed Merkin steered assets to Madoff and concealed Madoff’s role.

Andrew Levander, an attorney for Merkin, said in a statement that his client “is pleased to have achieved a resolution that is fair to his investors.”

The docket for the Supreme Court appeal can be found in Velvel v. Picard, 11-00986, U.S. Supreme Court (Washington). The Madoff brokerage liquidation 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).

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