Irving Picard, the trustee liquidating Bernard L. Madoff’s bankrupt brokerage, asked a judge to reject customer objections to a second payment, saying their arguments would cut the payout by $1 billion.
The Madoff trustee, who has so far paid the confidence man’s customers $333 million from a fund set up to compensate them for losses, said last month a second payment might be as large as $2.4 billion. Prices of Madoff claims rose in anticipation of the announcement to 65 cents on the dollar or more from the low 60s, according to Joseph Sarachek, managing director of claims trading at CRT Capital Group LLC, which buys and sells distressed debt.
Some customers objected because they are fighting in court for 9 percent interest as well as return of lost principal, with the interest representing so-called time-based damages for the December 2008 loss of their money when the Ponzi scheme collapsed.
Picard, who says the law governing brokerage liquidations doesn’t support interest payments on money lost in the Ponzi scheme, has said he will keep 3 percent reserves pending a court ruling on the issue.
“Even if the trustee’s position with respect to time-based damages was somehow mistaken, an interest rate of 9 percent is not appropriate because it no longer has any relation to normal interest rates in the commercial world,” he said in a filing in U.S. Bankruptcy Court in Manhattan.
According to Picard, he would have to hold back around $1 billion to pay the 6 percentage-point difference between reserves of 3 percent and 9 percent. If that happens, and the payout is less than anticipated, Madoff claim prices “will likely plummet,” Sarachek said.
Court challenges had been tying up the majority of the $9 billion that Picard has raised since Madoff’s 2008 arrest, mostly through settlements.
In June, money was freed up when a former Madoff customer, Adele Fox, dropped her challenge to the Jeffry Picower estate’s forfeiture of $5 billion to Madoff’s estate and more than $2 billion to the U.S., and the U.S. Supreme Court refused to hear a challenge to Picard’s payment formula.
Picard has $7.3 billion available to put into the fund for Madoff customer payments, according to his website. He has so far approved $7.5 billion of claims meriting payment, it says. In all, customers who filed claims lost around $17.3 billion of principal, he has said.
Part of the $5 billion received from Picower’s estate would be used for the second payment, Picard said last month. In a lawsuit, Picard accused the deceased Picower, among Madoff’s largest investors, of knowing of the fraud.
Picard has charged more than $300 million for his firm’s Madoff work. Madoff is serving a 150-year prison sentence.
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).