The trustee trying to clean up the financial wreckage left by Ponzi-schemer Bernard L. Madoff won an important ruling on Tuesday in the U.S. Court of Appeals for the 2nd Circuit, which affirmed the trustee’s method of determining who can recover money lost in the fraud.
A three-judge panel of the 2nd Circuit upheld the approach of trustee Irving Pickard, who determined earlier that Madoff investors who thought they were “net winners,” meaning they withdrew more money from their Madoff accounts than they put in, are not entitled to share in the pool of money Pickard has managed to recover for Madoff’s victims.
The appeals court in New York said Picard can calculate losses by subtracting the amount withdrawn from an investor’s account from the total placed with Madoff, “the so-called net investment method,” Bloomberg reported.
Some of Madoff’s victims had argued that Picard should use their final account statements – which reflected fictitious profits – to determine losses. But to proceed that way would have “the absurd effect of treating fictitious and arbitrarily assigned paper profits as real,” Chief Judge Dennis Jacobs wrote for the panel. In other words, those who thought they made money with Madoff are out in the cold.
The ruling will limit the number of victims who can claim money from the fund Picard oversees and reduces the monetary amount of many eligible claims, Bloomberg reported.
“Picard’s loss calculation method also reduces the amount of payouts to Madoff investors by the Securities Investor Protection Corp., which reimburses defrauded investors up to $500,000 per account,” Bloomberg said. Picard represents SIPC.
“The Second Circuit’s ruling will destroy investor confidence in the capital markets because the promise of SIPC insurance is illusory,” Helen Chaitman, a lawyer for many Madoff victims, said, according to Bloomberg. “The message to every American who invests in the stock market is clear: Invest at your own risk and assume that SIPC insurance does not exist.”
But Amanda Remus, a spokeswoman for Picard, said in a statement that the trustee has “maintained all along that our definition of net equity — which is supported by longstanding precedents in bankruptcy and securities laws — is the fairest approach to the determination of claims,” Bloomberg reported.
Bloomberg said that, by suing investors, banks and others who profited from Madoff or should have known of his fraud, Picard is seeking a total of about $100 billion. He has raised more than $8.6 billion, or almost half the $17.3 billion in principal he calculates investors lost in the fraud, Bloomberg reported. (See Main Justice report from December.)
Madoff, 73, was sentenced to 150 years in prison for what has been described as the largest Ponzi scheme in U.S. history.
