Most Madoff Victims Denied SIPC Repayments a Year After Arrest

By Erik Larson

Dec. 11 (Bloomberg) -- Most of the people who say they lost money with Bernard Madoff have had their claims denied because they invested with the con man indirectly or withdrew more money than they put in.

Trustee Irving Picard has turned down about 9,900 of the 11,500 people whose claims he has analyzed, with another 4,500 cases still to be looked into. The 1,600 people whose claims he has approved have losses totaling $4.69 billion, though they’ll get at most $500,000 to begin with, pending the results of Picard’s suits against people he regards as beneficiaries of the biggest Ponzi scheme in history.

One year after Madoff’s arrest in his penthouse apartment in Manhattan on Dec. 11, 2008, exposing the swindle that ruined thousands of investors, the denial of most claims and the approval of some at lesser amounts than victims sought has emerged as the biggest dispute in the case. Many alleged victims argue they should be paid years’ worth of fake profit.

While Picard said yesterday he’s processing claims as quickly as possible, he declined to estimate when he’ll finish.

“Getting visibility into older account records has unfortunately been a slow process,” Picard said in an e-mail. “We are making progress and issuing new determinations regularly.”

Picard’s method for determining claims is “grossly unfair,” retiree Ken Macher, who claims he lost a savings account once worth $1.6 million, said in a Dec. 7 filing in U.S. Bankruptcy Court in New York. Picard is depriving Macher of “some small relief from the loss of our entire investment,” he said.

Macher’s claim was denied because he withdrew $1 million in 2007 after having invested only about $365,500, according to the filing. Macher, of Fairfax, California, said the funds were immediately placed in another Madoff account that was wiped out.

Reality

“We never received any of the money,” said Macher, who said in his filing he took a consulting job to help save his home. “Equating this transaction with a withdrawal in which the investor actually received the funds ignores the reality of the circumstances.” A call to the phone number listed for Macher’s address in Fairfax wasn’t returned.

Picard is calculating claims based on cash deposits minus withdrawals.

Helen Chaitman, who testified Dec. 9 in Washington at a congressional subcommittee hearing about the case, said the liquidation is taking too long because Picard didn’t set claims based on Madoff’s last account statements.

“He’s violating a federal statute which mandates that customers be paid based on their last statements,” Chaitman said yesterday in a phone interview. “He’s going through decades’ worth of records in order to disqualify eligible investors.”

February Hearing

U.S. Bankruptcy Judge Burton Lifland will consider the disagreement at a Feb. 2 hearing in New York.

Picard, hired by the government-chartered Securities Investor Protection Corp., said yesterday that cash losses were about $19.4 billion, while victims thought they had $65 billion based on profit from securities that Madoff didn’t actually purchase. Picard previously estimated that cash losses were $21 billion and said yesterday that his new figure may change as the investigation continues.

SIPC will pay about $561 million for the investors’ claims, money it has raised through fees charged to its 5,227 brokerage firm members. Investor claims that exceed $500,000 will get a share of what Picard recovers in lawsuits seeking about $15 billion in fake profit to be distributed to victims.

Feeder Funds

Out of 11,500 determined so far, Picard denied about 9,900, mostly because they invested indirectly through so-called feeder funds.

Picard has said the victims who invested indirectly through so-called feeder funds may still get some cash if claims by the funds are approved and those funds use the money to repay customers. Some feeder funds have also had claims denied.

“Most of the feeder funds deposited more money than they received back,” Picard said in yesterday’s e-mail. “Thus, they should have allowed claims and receive payments.”

Billions of dollars in investor cash were funneled into the fraud by funds including those run by New York-based Fairfield Greenwich Group, investment manager J. Ezra Merkin’s Gabriel Capital Corp., Spanish lender Banco Santander SA and Bermuda- based Kingate Management Ltd., among others. Many of the funds were sued by Picard for the return of profit from the fraud.

Madoff, 71, pleaded guilty in March and is serving a 150- year sentence at a federal prison in Butner, North Carolina.

The case is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC, 08-01789, U.S. Bankruptcy Court, Southern District of New York (Manhattan).