For Madoff Victims, an Avenging Angel

When Bernard Madoff's investment firm collapsed in history's biggest Ponzi scheme more than two years ago, Irving Picard was appointed to the daunting job of trying to collect some of the $65 billion purportedly in customer accounts. Now, with about $10 billion in hand, Picard may be on his way to recovering the $20 billion in principal he estimates was lost to Madoff. And as he pursues hundreds of lawsuits seeking $100 billion from banks and others he claims profited from the fraud, he may be able to give some victims something Madoff never even tried to deliver—a return on their investment.

His strategy is simple. "We're looking to collect as much money as possible," Picard said outside court Jan. 13, after a bankruptcy judge approved a $7.2 billion settlement Picard and U.S. prosecutors reached with the estate of Jeffry Picower, a Madoff investor who died in 2009. The Picower settlement—the biggest of its kind—underscores the tricky position Picard is in: To return money to Madoff's victims, he has to first take it from somebody else. Picard's choices about whom to pay and whom to sue have led some victims to feel wronged again.

"He's doing what the receiver is supposed to be doing … going after deep-pockets he believes could have put an end to the fraud," says John V. Donnelly III, a partner with the law firm Cozen & O'Connor in Philadelphia, who represented an investor in recovering assets frozen in R. Allen Stanford's alleged $7 billion fraud.

Sandra Mayerson, a bankruptcy lawyer with the firm Squire Sanders in New York, says Picard has made several decisions that paid off, including seeking additional funds from investors he claimed should have known they were profiting from a fraud. "He's consistently taken the most aggressive position possible," she says, "and that's been very successful in recovering money for the estate."

Just days after Madoff told authorities his financial empire was "one big lie" in December 2008, the Securities Investor Protection Corp. named Picard, 69, trustee of Bernard L. Madoff Investment Securities, making him responsible for unwinding the biggest fraud in the agency's history. Picard, who graduated from Boston University School of Law in 1966, has worked for the U.S. Securities and Exchange Commission. When he was named Madoff trustee, the SIPC said Picard had liquidated more brokerage firms as trustee than anyone. A week later he announced he was leaving his law firm, Newark (N.J.)-based Gibbons, for the New York office of Baker Hostetler, a 650-lawyer firm based in Cleveland. At Baker Hostetler, he joined David Sheehan, 67, a friend and former law partner, who serves as his chief lawyer in the Madoff case.

In December, Picard filed a $19.6 billion suit against Bank Medici and its founder, Sonja Kohn, whom Picard called Madoff's "criminal soul mate," along with Bank Austria and UniCredit. Kohn, who hasn't been criminally charged, has said she was a victim of the fraud. Also in December, Picard sued HSBC Holdings (HBC) for $9 billion and a group of banks including Citigroup (C) and Bank of America (BAC) for $1 billion. Picard alleges they profited from Madoff's decades-long fraud. The banks have denied wrongdoing and vowed to fight the lawsuits.

In complaints unsealed this month, Picard claimed Fred Wilpon and Saul Katz, owners of the New York Mets, and JPMorgan Chase (JPM) had all the information they needed to discover Madoff was running a vast fraud and looked the other way instead of taking steps to expose him. The suits seek $6.4 billion from JPMorgan and as much as $1 billion from Wilpon and Katz. Jennifer Zuccarelli, a spokeswoman for JPMorgan, said in a statement that the bank wasn't aware of Madoff's fraud. The activity in Madoff's account was consistent with a legitimate investment advisory business, she says. Wilpon and Katz said Picard's suit against them is "an outrageous strong-arm effort to try to force a settlement by threatening to ruin our reputations and businesses."

If Picard and Wilpon and Katz decide to negotiate a settlement, they might model it on a deal made in connection with Bayou Group's Ponzi scheme, uncovered in 2005. In that instance, a partnership tied to Wilpon gave up $12.9 million, which represented all profits it made plus 44 percent of the principal, after a judge ruled that Bayou investors could be pursued if they had seen "red flags" that should have alerted them to the fraud.

Mayerson says the case against Wilpon and Katz "will strike fear into the hearts of a lot of people, because if they should have known, then a lot of people should have known."

Not all of Picard's targets are banks or wealthy investors. Helen Chaitman, a New York City lawyer who was a Madoff investor, says she represents many people of relatively modest means whom Picard sued in the weeks leading up to the Dec. 11 deadline for him to file claims. The date, which was the two-year anniversary of Madoff's arrest, was also the day his son, Mark Madoff, committed suicide by hanging himself in his Manhattan apartment. Madoff, 72, is serving a 150-year sentence in federal prison in North Carolina.

Some individuals, known as "net winners," withdrew more from their Madoff accounts than they invested. Picard is suing hundreds of them to recover the fictitious profits he frequently refers to in legal papers as "other people's money." Most of them withdrew the money and spent it with no idea they were living off the proceeds of a fraud, says Chaitman, and many have no way to pay. "These people are frantic," she says. Even clients with approved claims, who are likely to receive money from Picard, have been forced to sell their claims to investors for 50 cents to 65 cents on the dollar because they need cash, she says.

In a December press conference and on his official website, Picard said he will use his discretion not to pursue claims against Madoff victims who can show that paying back their profits from the fraud would cause financial hardship. As of Feb. 4, Picard had allowed claims made by 2,401 former Madoff investors and denied more than 13,471, according to his website.

For Picard the work has been lucrative. So far the bankruptcy court has approved $119 million in legal fees for him and Baker & Hostetler. The money is to be paid by the SIPC, Picard has said in court papers. Work on the Madoff case accounted for at least $58 million of the firm's estimated $386 million revenue in 2010, according to The American Lawyer.

Chaitman, who has frequently opposed Picard in the Madoff case, credits him with uncovering details of Madoff's fraud, including the identities of many alleged accomplices that haven't come out through criminal prosecutions or an investigation by the SEC. "Thank God for Picard," she says.

The bottom line: Picard may be able to recover the $20 billion investors gave to Madoff, and possibly some of their supposed profits as well.

    Before it's here, it's on the Bloomberg Terminal.