The court-appointed trustee tasked with recovering assets for victims of Bernard Madoff's massive Ponzi scheme announced a $497 million settlement with two Cayman Islands hedge funds that brings the total amount recovered to approximately $10.3 billion. Irving Picard, the bankruptcy trustee for Madoff's now-defunct broker-dealer, filed a Motion to Approve Settlement (the "Motion") with Herald Fund SPC and Primeo Fund (the "Funds"), two "feeder" funds that had funnelled investor funds to Madoff. With the settlement, Picard has now recovered approximately 59% of the estimated $17.5 billion in losses attributable to Madoff's fraud; with the inclusion of funds paid to victims from Madoff's membership in the Securities Investor Protection Corporation, all investors with losses of $925,000 or less have been fully paid back.
The Funds maintained various accounts with Madoff's firm, investing both directly and through other funds that also had exposure to Madoff. In the six years preceding the collapse of Madoff's scheme, the Funds withdrew more than $700 million in invested principal from Madoff's firm. Picard filed lawsuits against Herald and Primeo in July 2009, and subsequently filed an amended complaint on December 5, 2010. As a protective measure, Picard also filed a proceeding against Primeo in the Cayman Islands.
Under New York law, transfers within six years of the filing of a bankruptcy petition may be recovered as proceeds of a fraudulent transfer. Because Madoff admitted to running a Ponzi scheme, these transfers are considered to be made with the actual intent to hinder, delay, or defraud.
While settlement negotiations had been ongoing for several years, the Motion implied that a Cayman court's 2013 placement of Herald into official liquidation - which replaced the fund's board of directors with a court-ordered slate - may have been the turning point. Picard entered into mediation with the Funds earlier this year, and recently reached an agreement.
The agreement calls for Herald to pay approximately $467 million to Picard, which includes a $100 million credit relating to an investment in Herald by JP Morgan that Herald had long maintained should be factored into any amount it purportedly owed. In addition, Primeo would pay approximately $29 million, which brings the total settlement by the funds to approximately $497 million.
The settlement also includes the allowance of a customer claim filed by Herald of approximately $1.64 billion, which Picard indicated represents Herald's net equity of $1.172 billion and the $467 million paid into the estate as part of the settlement. Notably, this claim amount would likely place Herald as among one of the largest investors in Madoff's scheme. As part of the settlement, Picard will make a "catch-up" distribution to Herald, since it was not allowed to receive distributions made to victims over the past few years due to the pending litigation, representing 46.059% of its allowed losses of $755,320,133 - of which Herald will use a portion to contribute its settlement amount with Picard.
Interestingly, while Herald filed a claim with Madoff's bankruptcy estate claiming scheme-related losses, Primeo did not. While the Motion for Approval of Settlement does not disclose the amount of Primeo's losses, it does disclose that all transfers made by Primeo during the six-year period preceding the bankruptcy filing were withdrawals of principal. Thus, it is entirely possible that Primeo's failure to file a proof of claim may have prevented it from recovering a significant portion of its losses, as Herald was able to do.
A hearing is scheduled for December 17, 2014 to present the settlement for court approval.
A copy of the Motion is below: