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).

Ponzi schemes seem to proliferate in tough economic times

CLEVELAND -- Warren Buffett described a classic Ponzi scheme when he told shareholders in a recent newsletter, "You only learn who has been swimming naked when the tide goes out."

Lately, there have been a lot of folks without suits on -- and no bigger example than Bernard Madoff, the Manhattan financier arrested in December and charged with massive securities fraud. His $65 billion scheme may be the largest Ponzi ever uncovered, but it is hardly the only one.

During the first three months of 2009, the Securities and Exchange Commission, the Commodity Futures Trading Commission and the FBI have charged dozens of investment officers or firms with Ponzi swindles. In Ohio, Ponzi scams in 2008 led the list of the top investment crimes for the second consecutive year.

Why the rash of cases?

Madoff’s Refusal on Conspiracy Said to Block Deal

- Bernard Madoff, facing a lifelong
sentence for the largest Ponzi scheme in history, didn’t agree to
a plea deal with prosecutors because of their demand that he
admit to a conspiracy, a charge that would require him to say he
worked with others, said people familiar with the matter.

Madoff’s decision not to negotiate a deal means the
government won’t have his help in determining whether his
employees assisted in the fraud, the people said. Madoff, 70,
will plead guilty today to all 11 counts he faces without any
promise of leniency or anything else in return. He could receive
150 years in prison at sentencing on charges including fraud,
perjury and money laundering.

Talks between defense lawyers and prosecutors over the
charges extended into late last week before the government
decided to proceed with the counts against him, according to a
person familiar with the matter.

“The information crafted by the government does not contain
a conspiracy charge, and you can read what you like into that,”
Mauro Wolfe, a Madoff attorney, said yesterday in an interview,
referring to a document listing the charges that was filed March
10 in federal court in Manhattan. “The information speaks for
itself.”

Madoff told 4,800 investors in November that their accounts
held $64.8 billion, though their holdings were a “small
fraction” of that, the government said in court papers. Madoff
defense lawyer Ira Sorkin said during a March 10 court hearing in
the case that his client will plead guilty today. Madoff arrived
at the courthouse this morning for the 10 a.m. hearing.

False Account Documents

Madoff told workers to create false account documents and
trade confirmations of phony returns, and to create false
financial statements for regulators, according to the government.

Prosecutors working for acting Manhattan U.S. Attorney Lev
Dassin said Madoff didn’t act alone in the fraud, which dated
back to the 1980s, according to the people. Janice Oh, a
spokeswoman for Dassin, declined to comment.

Madoff was arrested Dec. 11 and charged with securities
fraud for using billions of dollars from new investors to pay off
old ones at his New York-based firm, Bernard L. Madoff Investment
Securities LLC. He was charged after the government said he
confessed to his sons and the Federal Bureau of Investigation
that he led a $50 billion Ponzi scheme.

At the March 10 hearing, prosecutors said Madoff would plead
guilty to securities fraud, as well as mail fraud, wire fraud,
investment adviser fraud, three counts of money laundering, false
statements, perjury, false filings with the Securities and
Exchange Commission and theft from an employee benefit plan.
Madoff, free on $10 million bond, may be jailed after his plea.

Conspiracy Charge

A conspiracy charge requires prosecutors to prove that two
or more people agreed to commit an illegal act, and that they
committed at least one act to further the crime. Madoff could be
charged later with conspiracy, and prosecutors may still charge
others involved in the scheme, former federal prosecutor
Christopher Clark said in an interview.

“It’s kind of rare in a white-collar case to have a one-
person indictment -- you often have a number of people
included,” Clark said. “You need two to tango in a conspiracy.
One thing it says about the current moment is that there’s no
other individual they’re claiming Madoff is conspiring with.”

By not charging Madoff with conspiracy, the government
“signaled it’s not going to stand in the way of him pleading
guilty,” said Daniel Richman, a former federal prosecutor who
now teaches law at Columbia University. Most judges would require
him to identify his co-conspirators if he were to plead guilty on
that charge, “and that would prevent him from going forward.”

Fictitious Returns

The U.S. claimed that Madoff hired unqualified workers for
his investment advisory business to generate documents showing
fictitious returns for investors. Madoff sought to give the
appearance of “operating a legitimate investment advisory
business” in which client funds were traded, when “no such
business was actually being conducted.”

Assistant U.S. Attorney Marc Litt said in court on March 10
that Madoff doesn’t have a plea bargain. Through such deals,
defendants often receive some benefit for pleading guilty, such
as a reduced sentence, in return for providing details about a
crime. Litt said Madoff will be required to plead guilty to all
11 counts.

In a March 10 statement, Dassin said the investigation of
the fraud is continuing.

By not entering a plea deal, Madoff may be trying to protect
employees of his firm, former federal prosecutor Christopher
Steskal said in an interview.

Protecting Employees

Madoff’s brother Peter was chief compliance officer at the
company, and his sons Mark and Andrew held senior positions in
the market-making and proprietary trading businesses. None of
Madoff’s family members have been accused of any wrongdoing.

Bernard Madoff’s wife, Ruth, who had been represented by
Sorkin, will hire her own lawyer, Sorkin said March 10.

An attorney for Peter Madoff, John “Rusty” Wing, didn’t
return a call seeking comment. Martin Flumenbaum, an attorney for
the sons, has said they “were not involved in the firm’s asset
management business” and “had no knowledge whatsoever of the
fraud.”

Prosecutors and regulators have been probing whether the
chief financial officer at the advisory firm, Frank DiPascali
Jr., knew of the fraud, according to people familiar with the
case. DiPascali has denied wrongdoing. His lawyer, Marc Mukasey,
didn’t return a call seeking comment.

Andrew Lankler, a lawyer for Madoff’s auditor, David
Friehling, declined to comment. A call to Madoff’s longtime aide,
Annette Bongiorno, wasn’t immediately returned. They aren’t
accused of any wrongdoing.

The criminal case is U.S. v. Madoff, 09-cr-00213, U.S.
District Court for the Southern District of New York (Manhattan).

To contact the reporters on this story:
David Voreacos in federal court in Newark, New Jersey, at
dvoreacos@bloomberg.net;
Robert Schmidt in Washington at rschmidt5@bloomberg.net;
David Glovin in New York federal court
at dglovin@bloomberg.net.