Victims of Bernard Madoff's massive Ponzi scheme are set to receive their first distribution of funds recovered in the wake of the fraud on Wednesday, five days after the initial distribution date was delayed. Irving Picard, the court-appointed trustee, had originally intended to make the distribution by September 30th to investors holding claims as of September 15th. However, the distribution was delayed after a federal judge dismissed most of Picard's claims against several owners of the New York Mets last week. Along with the dismissal of nearly all of Picard's claims, United States District Judge Jed S. Rakoff also made several rulings that could potentially threaten the magnitude of any future recoveries in the approximately 1,000 cases filed by Picard thus far. Ponzitracker covered Judge Rakoff's ruling in greater detail here. In a statement late last week, Picard announced that out of an abundance of caution, his legal team was delaying the scheduled distribution to evaluate the impact of the rulings.
The majority of lawsuits filed by Picard have sought to "claw back" false profits from investors who withdrew more funds than they invested with Madoff. Based partly in equity, this procedure seeks to pool all recovered funds and make pro rata distributions to all investors, rather than allowing some investors, usually those that were able to invest in the scheme earlier on, to keep their profits while ignoring others who had invested later and had not received as many purported interest payments to offset their principal investment losses. Because of the duration of Madoff's scheme, which Picard argues spanned several decades, thousands of investors had accounts with Madoff. Some who were fortunate to invest in the early days of the scheme have since recouped their original investment by many times. Picard's largest single recovery to date comes from the estate of one of these early investors, Jeffrey Picower, who agreed to return over $7 billion of false profits received during his relationship with Madoff.
In the ruling last week, Judge Rakoff dismissed nearly all of Picard's claims asserted against several principals of the New York Mets. Picard had taken the rare step of not only asking for any false profits, but also for the return of the original principal investment, arguing that the mens' close relationship with Madoff and investing knowledge should have alerted them to the fraud. Judge Rakoff's ruling severely limited Picard's reach, holding that a "Safe harbor" provision in the U.S. Bankruptcy Code forbade Picard from seeking any false profits received over two years from the date Madoff's brokerage filed for bankruptcy. This safe harbor provision restricts a bankruptcy trustee's power to recover payments that are otherwise avoidable under the Bankruptcy Code, and represents the interplay between bankruptcy and securities law. While Picard had argued that the "safe harbor" provision did not apply, Judge Rakoff held otherwise.
In his statement issued today, Picard stated that additional settlements had allowed him to increase the amount of the initial distribution from $272 million to $312 million. This distribution would account for roughly 4.6% of allowed investor losses. Picard also stated that the total funds recovered for victims thus far had increased to $8.694 billion - approximately 50% of the $17.3 billion amount Picard had estimated was lost by Madoff's victims. Of the nearly $2.4 billion available for distribution, most remains tied up by pending litigation.
Investors with allowed claims have also received over $700 million in total cash advances from the Securities Investor Protection Corporation ("SIPC"), a federally-mandated non-profit that protects investors if a broker-dealer fails. Nearly all broker-dealers registered with the Securities and Exchange Commission are members of SIPC. Under SIPC guidelines, investors holding securities or cash in accounts of failed broker-dealers are entitled to receive up to $500,000 in cash advances to cover their losses.
A copy of the Statement issued today by the Trustee is here.