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Thursday
Jul282011

Madoff Trustee Reaches $1 Billion Settlement with Feeder Funds

The court-appointed trustee overseeing the liquidation of Bernard Madoff's defunct brokerage announced that he had reached a settlement with Tremont Group Holdings, Inc., one of the largest feeder funds providing money to Madoff's scheme.  The settlement resolves allegations by Irving Picard, the court-appointed trustee, that Tremont Group Holdings and various affiliate funds funnelled more than $4 billion to Madoff and enjoyed substantial profits while ignoring glaring signs of fraud.  The settlement also brings to nearly $9 billion the amount recovered by Picard to distribute to defrauded investors, more than half of the $17.3 billion estimated by Picard as total principal losses from Madoff's fraud.

In a 130-page complaint filed on December 7, 2010, Picard alleged that Tremont Group Holdings and its numerous investment funds and affiliates "substantially aided, enabled and helped to sustain" Madoff's scheme, ultimately receiving more than $2.1 billion in avoidable transfers that Picard sought to recover as well as up to $240 million in fees over the term of its relationship with Madoff.  Additionally, rather than conduct due diligence as Tremont and its affiliates increasingly increased their exposure with Madoff, Picard claimed that Tremont remained "blissfully ignorant" as its returns remained steady.  This ignorance came even as increasing skepticism over Madoff's operation arose within Tremont, including Tremont's statement in 2006 that Madoff's operation "does not represent the best industry practices."

According to court documents, Picard and Tremont have been engaged in good-faith settlement discussions since 2009.  Several defendants had filed proof of claims with Picard before the July 2, 2009 claim bar date, asserting account losses in the aggregate amount of over $4 billion based on final account statements provided by Madoff as of November 30, 2008.  Picard disputed the calculation of this amount, arguing that the claim determination should have been made under the net equity method of calculating claims that was later approved by United States Bankruptcy Judge Burton Lifland.  Under this method, Picard countered that the total claim amount should be slightly over $2 billion.

The terms of the settlement address not only Picard's claims for avoidable transfers against the Tremont defendants, but also resolve the uncertainty surrounding their filed customer claims.  Under the settlement, the Tremont defendants will pay Picard $1 billion in cash, which will be transferred to the "Customer Fund" for eventual distribution to defrauded investors.  In return, Picard will deem as "allowed" the customer claims of the Tremont funds in the amount of $2,186,177,715.88.  Doing so will also entitle the funds to protection afforded by SIPC, which includes an advance of $500,000 per customer claim.  Another fund, Insurance Portfolio LDC, will also have its customer claim deemed as "allowed" upon the receipt of $25 million to Picard to be held in escrow for a short period.

The settlement is unique in that it appears to be the first settlement in which Picard has accepted less than what he had claimed were traceable to Madoff's scheme.  While Picard alleged avoidable transfers under the Bankruptcy Code of $2.1 billion, he has agreed to forego over $1 billion in potential recovery, apparently taking the view that the prospect of prolonged litigation was outweighed by a quick and expeditious resolution of the claims.  Picard's stance differs from those taken against past notable settlements including those of Norman Levy, Carl Shapiro and Jeffrey Picower.  There, Picard demanded the return of all profits traceable to Madoff's scheme.  While avoidable transfers are certainly different than avoidable transfers, the apparent indication that Picard may be willing to negotiate may spur other feeder fund defendants to settle as well.

Picard may also be seeking to shore up resources as litigation heats up with several high-profile banking entities sued by Picard, including JP Morgan, HSBC, and UBS.  Recent weeks have seen a flurry of activity in these cases, including transfers from Bankruptcy Court to Federal Court and claims that Picard lacks standing to assert any of his claims.  

According to documents filed with the US Bankruptcy Court, objections must be made to the proposed settlement before September 6, 2011.  A hearing is currently scheduled for September 13, 2011 for approval of the settlement.

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