[I]t appears that at least twice as many investors as previously thought lost money in the Madoff fraud, with losses running many billions larger than previously documented. By far the greatest number of victims report that they have not recovered anything since the fraud. For many of those individuals, the forfeiture program can be a true lifeline.
-Special Master Richard C. Breeden
The special master administering the distribution of more than $4 billion in forfeited assets by the federal government in connection with Bernard Madoff's $65 billion Ponzi scheme announced that more than 50,000 claims had been submitted asserting losses of more than $40 billion. Richard C. Breeden, the Special Master appointed by the Department of Justice, disclosed that investors from 119 countries had submitted approximately 51,700 claims to the Madoff Victim Fund ("MVF"), which currently holds more than $4 billion in funds forfeited to the government - including $1.7 billion from JP Morgan's $2.6 billion settlement with federal authorities.
The announcement highlighted the unexpected number and diversity of claims received, noting that the 51,700 claims represented more than three times the amount of claims submitted to the court-appointed bankruptcy trustee overseeing the liquidation of Madoff's brokerage firm - and approximately 20 times larger than the number of claims ultimately approved in the bankruptcy proceeding. While victims from the United States submitted the largest number of claims and accounted for approximately 58% of claimed losses, the majority of persons filing claims came from outside the United States. And at least 26 countries had 100 or more victims.
The amount of claimed losses is also significant, in that the $40 billion amount significantly dwarfs the monetary value of the claims allowed by court-appointed trustee Irving Picard in the bankruptcy proceeding. This includes claimants from 78 jurisdictions with average losses of $500,000 or more - including 28 jurisdictions with average losses per claimant of $1 million or more. Further, while victims hailing from the United States had the greatest cumulative amount of losses, at least 24 jurisdictions featured victims with average losses exceeding the average loss of U.S. victims.
Given that the number of claims received by the MVF is significantly higher than the number of claims filed in Madoff's bankruptcy proceeding, the announcement raises the prospect that the amount of losses attributable to Madoff's scheme could exceed those reported by trustee Irving Picard. According to Breeden, more than 36,000 claimants - or approximately 70% - reported not having recouped any of their losses from any source, including the court-ordered claims process in the bankruptcy proceeding.
One of the reasons for the increased number of claims is likely attributable to the expanded definition of a "victim" used by the MVF. Indeed, rather than apply only to those who invested directly with Madoff, the MVF allowed the submission of claims from those ‘indirect’ victims whose exposure to Madoff came through ‘feeder’ funds, investment groups, or other pooled investment vehicles. Notably, Picard successfully sought to deny claims from such 'indirect' investors on the basis that no customer relationship existed due to the fact that the investors lacked an account with Madoff, were not present on the firm’s books and records, lacked control over their investments, and did not receive statements or distributions from Madoff. Judging from the number of claims reviewed by the MVF, it appears that the amount of "indirect" investors impacted by Madoff's scheme may have been higher than previously thought.
The MVF will use a “net investment method” to calculate investor losses on a “cash in, cash out” basis. Breeden cautioned that the number of claims and cumulative losses are subject to change pending a review of each claim, and indicated that he expected a "substantial" number of claims would be denied as ineligible, duplicated, or overstated. Ultimately, a recommendation for each claim must be made to the Department of Justice, which retains final discretion.