Madoff Trustee Sets Record Date of September 15th for Victims Entitled to First Distribution

According to a court filing by the trustee tasked with marshalling assets for the benefit of victims of Bernard Madoff's multi-billion dollar Ponzi scheme, investors holding claims as of September 15th, 2011, will be entitled to receive the $272 million set aside for a first interim distribution.  Additionally, Irving Picard, the court-appointed trustee, also stated that holders of claims that were sold or transferred are eligible to receive a distribution only if the sale or transfer of the claim was made on or before August 25, as such sale or transfer is subject to a 21-day notice and objection period.  As Bloomberg reports, the initial distribution will go out by the end of the third quarter, or September 30th.  

In his Motion for an Order Approving Initial Allocation of Property (the "First Distribution Motion"), filed May 4, 2011 and approved by United States Bankruptcy Judge Burton R. Lifland on July 12, 2011, Picard sought to make an initial distribution of $272 million to Madoff victims, an amount that Picard stated would have been much higher if not for the pending appeals preventing the availability of additional funds.  As explained by Picard,

The reduced amount is the result of various appeals that have been filed, including, but not limited to, the appeal relating to the “net equity” dispute, ... the appeals relating to the $5 billion Picower settlement, ... and the appeal relating to the settlement with the Levy family.

The distributions will be paid on claims relating to 1,224 former accounts at Madoff's brokerage.  According to Picard, the average payment amount to each of those holders will be $222,551.12.

Legal developments since the First Distribution Motion have bolstered the position of investors Picard termed "net losers" whose account losses exceeded any withdrawals.  The most important decision was the August 16th order of the Second Circuit Court of Appeals affirming the method Picard used to determine investor claims.  While some investors argued that they were entitled to recover the market value of the securities reflected on their last account statement before Madoff's scheme collapsed, Picard disagreed, arguing that the class of customers with allowable claims were those who deposited more cash in their investment account than they withdrew.  The Second Circuit agreed with Picard's method, stating that:

Use of the Last Statement Method in this  case would have the absurd effect of treating fictitious and arbitrarily assigned paper profits as real and would give legal effect to Madoff’s machinations. 

This decision was an important victory for Picard, who was forced in his First Distribution Motion to "maintain... significant reserves, which decrease the amount available for distribution from approximately 44% to approximately 13%."  This percentage was further reduced to 4% of claims due to various settlements under appeal.  Assuming that the Second Circuit's order is not appealed to the Supreme Court, it is likely that Picard's next distribution to investors will have significant additional funds available.

A Copy of the First Distribution Motion is here.

A Copy of Picard's filing setting the Record Date is here.

A Copy of the Second Circuit's Order Affirming the Net Investment Method is here.

Appeals Court Affirms Madoff Trustee's Claim Determination Method

A New York appellate court issued an opinion today affirming the method used to determine loss amounts suffered by victims of Bernard Madoff's colossal Ponzi scheme. Under this method, each Madoff victim's net equity was calculated by crediting the amount of cash deposited by the customer into his or her account, less any amounts withdrawn from the account. Irving Picard, the court-appointed trustee overseeing the liquidation of Madoff's failed broker-dealer, had faced opposition from groups of investors (the "Objecting Investors") who instead urged the use of each investor's last reported account statement balance before Madoff's scheme was exposed.

Following United States Bankruptcy Judge Burton R. Lifland's opinion affirming Picard's use of the net investment method, several investor groups appealed the decision to the Second Circuit Court of Appeals. Addressing the arguments of Picard and the Objecting Investors, Chief U.S. Circuit Judge Dennis Jacobs first noted that SIPA's statutory language  "does not prescribe a single means of calculating net equity that applies in the myriad circumstances that may arise in a SIPA liquidation."   Instead, such a determination should be based on specific fact patterns. Weighing the differing approaches set forth by the parties, Judge Jacobs concluded that:

Mr. Picard's selection of the Net Investment Method was more consistent with the statutory definition of net equity than any other method advocated by the parties or perceived by this Court. There was therefore no error...If the Last Statement Method were adopted, those claimants who have withdrawn funds from their BLMIS accounts that exceed their initial investments would receive more favorable treatment by profiting from the principal investments of those claimants who have withdrawn less money than they deposited, yielding an inequitable result.

Further elaborating on this reasoning, Judge Jacobs emphasized the underlying fact that the customer statements were nothing more than after-the-fact constructs that were simply molded to reflect historical market transactions. Adoption of the Last Statement Method, theorized Judge Jacobs, would simply serve to serve as a stamp of judicial approval of Madoff's fraud. He concluded that the use of the Last Statement Method in this case would have the absurd effect of treating fictitious and arbitrarily assigned paper profits as real and would give legal effect to Madoff's machinations.

The ruling today has several important ramifications. First, investors who withdrew more than their original principal investment, termed net winners by Picard, are not entitled to share in any funds recovered by Picard for the benefit of defrauded investors. To date, that amount has increased to over $10 billion. Second, by virtue of excluding these so-called net winners from any right to recovered funds, the number of customers with viable claims is diminished, and more funds are available to investors whose invested principal exceeded any withdrawals.

The decision has implications for the now-ongoing process of distributing recovered funds back to defrauded investors. As previously covered by Ponzitracker, Picard filed a motion with the court in May seeking approval of his plan to make the first interim distribution to investors. In that motion, he outlined several theoretical calculations of the percentage each investor would expect to receive under the first distribution, with the variations resulting from different figures for the total amount of allowed claims. When the motion was filed, Judge Burton Lifland's approval of Picard's use of the net investment method to calculate distribution to investors had been appealed to the Second Circuit. While Picard sought to use the figure of $17.3 billion, which represented his estimate of the total principal losses suffered by Madoff investors, the pendency of the net investment method decision forced him to instead use the much-larger figure of nearly $57 billion to calculate investor distributions, which represented the aggregate amount of purported holdings as determined by each investor's final account statement. Thus, investors would receive a lower pro rata share of their claim amount.  As Picard stated,

Were the Net Equity Decision to be reversed, those claims of net winner customers that have been denied to date may become allowable and eligible for a distribution from the Customer Fund. In order to ensure that there are funds sufficient to make a pro rata distribution in that eventuality, the Trustee is maintaining significant reserves, which decrease the amount available for distribution from approximately 44% to approximately 13%.

Additional pending appeals further reduced the pro rata amount of each investor's proporsed distribution down to just over 4% of each approved claim. Barring the grant of certiorari (review) by the United States Supreme Court, investors with allowed claims now stand to receive a greater amount in future distributions. Picard has indicated that the first interim distributions are scheduled to commence in September, and it remains unknown as to whether those amounts could change in light of this decision.

A copy of the Second Circuit opinion is here.

Bankruptcy Judge Denies Cohmad Motion To Dismiss

The trustee for Bernard Madoff's failed Ponzi scheme scored a victory when a United States Bankruptcy Judge denied a bid to dismiss claims seeking $245 million in fraudulent transfers.  Irving Picard, the court-appointed trustee overseeing the liquidation of Bernard L. Madoff Investment Securities ("BLMIS"), had sued Cohmad Securities Corp. in June 2009, asserting that the broker-dealer formed by Madoff and his close friend Sonny Cohn functioned primarily to divert billions of dollars into Madoff's scheme.  Cohmad later filed a motion to dismiss Picard's claims, asserting that Picard had failed to plead his claims with requisite particularity, and thus warranted dismissal.  United States Bankruptcy Judge Burton R. Lifland denied Cohmad's motion to dismiss, finding that Picard had sufficiently pled his claims.

In his complaint, Picard had alleged that Cohmad, its registered representatives, its co-founder Cohn, and certain relatives of Cohn all held investment advisory accounts with BLMIS.  Collectively, these individuals withdrew over $100 million from their accounts at BLMIS before the fraud was discovered.  Under federal bankruptcy laws, Picard sought to avoid these withdrawals as fraudulent transfers.  Under Rule 9(b) of the Federal Rules of Civil Procedure, actual fraudulent transfer claims brought under the federal Bankruptcy Code or under New York law must satisfy heightened pleading requirements.  Judge Lifland found that Picard's attachment of seventeen exhibits detailing each withdrawal of fictitious profits satisfied these heightened pleading requirements.

Picard also sought return of fees or commissions paid as incentive for the referral of victims to Madoff's scheme. As a result of referring several billions of dollars in investor funds, Cohmad received a substantial amount of commissions from BLMIS.  By instituting a dual system of payments, in which BLMIS would pay monthly commissions to Cohmad, who would in turn distribute commissions to individual representatives, Picard alleged this was indicative of Cohmad's knowledge of the fraud.  From January 1996 to 2008, Picard alleged total commission payments totalling nearly $100 million.  These payments, alleged Picard, constituted nearly all of Cohmad's income during the eight years leading up to 2008.  In ruling that Picard had satisfied pleading requirements for the commissions, Judge Lifland again cited exhibits attached by Picard detailing these payments with requisite particularity. 

Finally, Judge Lifland rejected Cohmad's contention that Picard was only entitled to seek fraudulent transfers from the date of the filing of the complaint against Cohmad in June 2009.  Instead, as asserted by Picard, the proper 'look-back' date to determine the amount of fraudulent transfers was the date Madoff was arrested and charged with securities fraud, on December 11, 2008. 

The case number is 09-01305-brl.