The trustee liquidating the Bernard Madoff Ponzi scheme under the Securities Investor Protection Act won an appellate victory in Manhattan District Court upholding the bankruptcy court-approved method for calculating customers’ claims involving inter-account transfers.
In his 53-page opinion on Jan. 14, District Judge Paul A. Engelmayer said that the approach proposed by Madoff trustee Irving Picard was the “only method” consistent with the Second Circuit’s so-called net equity opinion in 2011. Judge Engelmayer’s decision upheld the trustee’s methodology in objecting to more than 400 customer claims.
Madoff pretended to be investing customers’ funds by purchasing securities. In reality, he never purchased a single share of stock. Consequently, all the profits shown on customers’ account statements were fictitious.
In the 2011 net equity decision, the Second Circuit upheld the trustee and ruled that a customer’s proper claim must ignore the account statements. Instead, each allowed claim equals the customer’s cash investment less amounts withdrawn, thus ignoring fictitious profits.
The 2011 decision did not address the method to employ when a customer transferred money from one Madoff account to another. Would the recipient’s account reflect fictitious profits in the transferor’s account?
Bankruptcy Judge Stuart M. Bernstein held in December 2014 that Picard must follow the circuit’s net equity decision in fixing the amount of a transferee’s claim. Consequently, a transferee would get credit for a transfer only to the extent that the transferor had a surplus of cash deposits in excess of withdrawals.
Judge Engelmayer explained how the trustee’s method could dramatically affect the amount of a transferee’s allowed claim. One customer, for example, would have had a valid claim for almost $300,000 if fictitious profits in the transferor’s account were counted. Under the methodology he upheld, that customer has no allowed claim.
The Jan. 14 opinion was lengthy because the judge was compelled to knock down a plethora of arguments urged by the customers, including a contention that honoring the net equity opinion would violate the U.S. Constitution.
When the liquidation began in December 2008, there was little hope for recovery by defrauded creditors at the time owed $20 billion, because Madoff had no securities on hand to back up customers’ accounts. Through lawsuits and settlements, Picard has taken in almost $11 billion.
Picard’s most recent distribution of almost $1.2 billion in December brought customers’ total recoveries to 57%. He has distributed $9.2 billion and is holding reserves of more than $2.1 billion, which will ultimately also go to customers. Customers with claims of $1.16 million or less have been paid in full.
Everything Picard collects goes to customers because the Securities Investor Protection Corp. covers administrative costs, which therefore do not come out of customers’ recoveries.