The trustee appointed to recover assets for victims of Bernard Madoff's infamous Ponzi scheme has sought court approval for a second distribution of $2.4 billion that, if approved, will fully satisfy nearly 90% of outstanding approved claims. The move was made possible after the trustee, Irving Picard, obtained two recent favorable outcomes freeing up billions of dollars in contested funds, as (1) the United States Supreme Court refused to hear arguments relating to the method used to calculate victim losses, and (2) a final non-appealable order was entered approving the $5 billion settlement with the estate of Jeffrey Picower. If approved, the distribution stands to dwarf the approximately $300 million doled out to investors in the first distribution in September 2011, where the majority of funds available were held in reserve pending the outcome of various legal challenges. However, while those challenges have been resolved, a new dispute has taken center stage concerning whether victims are entitled to a time-based upwards adjustment in the value of their claim. While Picard proposes a second distribution of $2.4 billion, he states that a single unresolved objection to his distribution procedure will result in the reduction of the second distribution by nearly $1 billion.
As of June 30, 2012, Picard and his team had received over 16,000 customer claims, with approximately 2,436 of those claims being "allowed" and having a total value of $7.47 billion. In addition to the first distribution in September 2011 which represented a roughly 4% payout, Madoff victims with allowed claims have also received up to $500,000 each from the Securities Investor Protection Corporation ("SIPC"), which provides protection against the failure of registered broker-dealers. Those payouts from SIPC have totaled over $800 million, which alone satisfied nearly 900 claims asserted by investors.
While the net equity calculation and Picard settlement disputes were settled, over 1,000 investors have objected to Picard's decision not to adjust the value of losses based on the amount of time each investor's funds were invested with Madoff's brokerage ("Time-Based Damages"). The objectors assert several bases for this contention, including that they are entitled to prejudgment interest at a statutory rate of 9%. Picard calls these arguments "specious at best", noting that there is no basis in the Securities Investor Protection Act ("SIPA") nor has any court construed SIPA to provide for Time-Based Damages. According to Picard,
SIPA is designed to return customer property to customers, rather than compensate them for injuries caused by a broker’s fraud. Claims for breach of contract or fraud are “not within the protection afforded by the Act,” but rather are general estate claims.
Additionally, Picard also takes exception to the statutory prejudgment interest rate of 9%, arguing that it has "no relation to normal interest rates in the commercial world." He points to a recent opinion out of the Southern District of New York, Sriraman v. Patel, which observed that the 9% rate was "absurd" and "effectively creates a windfall for plaintiffs". A 9% interest rate would also reward those who had long-term investments with Madoff at the expense of shorter-term investors, for the annual interest would allow those investors to recoup their original investment much quicker than the short-term investors.
Were Picard not forced to maintain reserves while the Time-Based Damages issue was resolved, he states he would be able to distribute a pro rata distribution of 41.286% of each customer's allowed claim. Maintaining reserves for Time-Based Damages of 9% cuts that figure in half, with a proposed pro rata distribution of 20.563% while the dispute is pending. In an effort to compromise, Picard contacted various objecting claimants, asking whether they would agree to maintain reserves representing Time-Based Damages of 3%, a figure slightly higher than the consumer price index. Picard received several responses, some which agreed and some which objected.
Despite the objections received, Picard decided to move forward with maintaining reserves to account for Time-Based Damages of 3%, which would result in a distribution representing 33.541% of each customer's allowed claim with incorporated Time-Based Damages of 3%. This would represent an average payment of $1.975 million for each of the 1,229 allowed claims. However, mindful of the likely delays associated with an appeal of the distribution, Picard conditions this distribution on the absence of any unresolved objections to the motion. Should any objections be made and remain unresolved, Picard planned to submit an order that would establish the amount of reserves for Time-Based Damages at (i) 9%, (ii) an amount agreed to by the parties, or (iii) a percentage directed by the court.
In the Motion, Picard also provides an update on the status of the $2.2 billion forfeited by Jeffrey Picower to the Department of Justice ("DOJ"), which was in addition to the $5 billion paid to the bankruptcy estate. Picard was appointed by the DOJ to serve as special master in the distribution of those funds, which are likely to go to "many of the customers to whom the Trustee proposes to distribute pursuant to this Motion." Thus, in addition to the over-$8 billion allocated to the Customer Fund for distribution to victims, an additional $2.2 billion would remain available for a future distribution.
Any objections to the Motion are due by August 8, 2012. A hearing has been scheduled for August 22, 2012 at 10:00 A.M.
A copy of the Distribution Motion is here.