Judge: Madoff Victims Not Entitled To Interest On Losses

"In this zero sum game where funds are limited, hard choices must be made....The plain language, purpose, framework and distribution scheme of SIPA, as well as (legal) precedent, all support the method chosen by the trustee"

- U.S. Bankruptcy Judge Burton Lifland

A federal bankruptcy judge ruled that victims of Bernard Madoff's massive Ponzi scheme were not entitled to have the amount of their losses upwardly adjusted to account for interest during the period of their investment.  More than 1,000 claimants had objected to court-appointed bankruptcy trustee Irving Picard's decision not to include "time-based damages" as part of their loss calculation, arguing that they should be compensated as if their funds had been invested in a legitimate fund that used the strategy Madoff purported to use.  United States Bankruptcy Judge Burton Lifland agreed with Picard that there was no statutory or equitable basis for such a claim, and entered an order denying the motion.  If the ruling is upheld, nearly $1.4 billion Picard had been forced to allocate to reserves would then be available for distribution to victims.

Shortly after his appointment, Picard made the decision to use the "net investment" method (also known as the "cash-in, cash-out" method) to calculate a victim's losses, rather than relying on the fictitious account statements Madoff had provided to his customers for decades showing steady gains.  The net investment method is widely used in Ponzi scheme jurisprudence, and only rarely and under unique circumstances are other methods used (such as the "rising tide" method.).  Picard would receive over 16,000 customer claims - ultimately "allowing" 2,436 claims with a total value of approximately $11.10 billion.  

However, many claimants objected to Picard's decision to use the net investment method, including not only net winners that had profited from Madoff's scheme, but also those net losers that suffered partial or total losses.  Of the various bases for claimant objections, one popular theory was that investors were entitled to receive "time-based damages" that would adjust their losses to account for a theoretical rate of return they could have (but did not) received.  While such a re-calculation would increase the amount of a claimant's net losses, it could also cause some net winners to be converted to net losers - thus significantly increasing the total amount of claims.  To account for the possibility of these changes, Picard has prevented nearly $1.4 billion from being distributed to victims in the three distributions he has made thus far.  

Picard strongly opposed altering his net equity calculation to include any upward adjustment for interest, arguing that nothing in the plain language of the Securities Investor Protection Act ("SIPA") or the statutory framework envisioned any ability to include time-based damages.  Picard also noted that such an adjustment would be at odds with the recovery and distribution approach used in most Ponzi cases and could conflict wth his powers to recover funds from investors that had profited from the scheme.  Indeed, if time-based damages were awarded, Picard stated that most of the reallocated distributions would be paid to feeder funds rather than individual investors.  As Picard summed it up, "[a]warding Time-Based Damages thus would not serve the purpose for which they are intended in most instances, would be extraordinarily expensive, would create enormous delays, and would create arbitrary results."

The objecting claimants must file an appeal within ten days or the order will become final.  

Picard's Motion in support of his position is here.