Supreme Court Declines to Review Calculation of Madoff Victim Losses; Second Distribution "In The Near Future"?
In a move that was not unexpected, the Supreme Court declined to grant certiorari to a petition filed by a subsection of victims of Bernard Madoff's massive Ponzi scheme who disagreed with the court-appointed trustee's determination of their losses. By doing so, the Court gave finality to the decision handed down by the Second Circuit Court of Appeals last year that agreed with Picard's use of the "Net Investment Method" to calculate victim losses and declined to give any credence to the balances rendered on the account statement provided to investors in November 2008 just before the scheme's collapse.
Under Picard's method, an investor's loss was determined by off-setting their total principal investment by any distributions or withdrawals. Thus, victims who withdrew more than they invested, termed "net winners", would not be entitled to share in the distribution of recovered funds to those investors who did not withdraw more than their initial investment. Additionally, net winners were also likely to be the subject of "clawback" actions seeking the return of any excess profits to be equitably distributed to all victims. Under the Net Investment Method, Picard estimated the total amount of victim losses at $20 billion. A group of investors had opposed this method, arguing that the "Last Statement Method" was the proper benchmark for calculating losses. This alternative method, which would have placed total losses at $60 billion, had been greeted with skepticism by Picard and federal judges, who had likened adopting the method to giving veracity to the fictitious performance numbers generated by Madoff. Additionally, the method seemingly favored those investors who had invested with Madoff over a longer period of time, and in turn received regular interest payments for years, at the expense of newer investors. Had the Supreme Court granted certiorari review and chosen the Last Statement Method as the appropriate metric, the number of victims entitled to payouts would have greatly increased, thus drastically reducing the amount available to satisfy all claims.
Along with providing legal finality to the dispute, the decision also paves the way for Picard to make additional distributions to investors. While the court challenge was pending, Picard was forced to set aside a majority of the $9 billion in assets recovered thus far, leaving only approximately $1.1 billion to make initial distributions to investors. Additionally, of that $1.1 billion, approximately $800 million had been provided from the Securities Investor Protection Corporation ("SIPC") by virtue of the Madoff brokerage's membership. Picard's first distribution to investors made in September 2011 represented only a 4.6% pro rata distribution of approved losses, prompting Picard to estimate that the distribution would have been over 40% had he not been forced to set aside the funds. According to Stephen P. Harbeck, chief executive of SIPC,
"these victims can now look forward to receiving a distribution in the near future."
SIPC has also been paying Mr. Picard's fees and costs.
Picard estimates that the decision freed up the majority of a $2.3 billion customer fund for distribution. Additionally, Picard indicated that an additional $5 billion, representing the proceeds of a settlement with the estate of Jeffrey Picower, may also be added to the customer fund and thus available for distribution if the settlement is not challenged by July 16. The attorney for the main challenger to the Picower settlement, Jim Beasley, has since indicated that he does not plan an appeal, and that "Picard gets the money." The money is currently being held in escrow, and can only be released upon presentment of a non-appealable court order upholding the deal. Picard has indicated he will seek court approval for a second distribution "within an expedited time frame."