Legal News

Who is a Madoff Victim? High-Stakes Question Gets Airing at 2nd Circuit

By Ashby Jones

Who are the Madoff victims?

It sounds like an easy enough question to answer, but it’s not. The issue took its star turn in front of the Second Circuit on Thursday, where former Madoff investors and Irving Picard (pictured), the trustee recovering money on behalf of victims, argued over who is in fact entitled to claim losses in the fraud. Click here for the WSJ story.

The judges grilled attorneys for the investors on whether to uphold Picard’s decision to approve claims based on how much of an investor’s principal deposits with Madoff were lost, or whether Picard should instead use the much higher final account statements fabricated by Madoff.

A lot is at stake. The judges’ decision is likely to determine which Madoff customers may collect up to $500,000 apiece from the Securities Investor Protection Corp., an industry association created under federal law to insure investors in failed brokerages. It is also expected to affect how to divide billions of dollars Picard is recovering through legal settlements with people who withdrew money from the Ponzi scheme.

According to the WSJ story, the appellate panel on Thursday at times appeared skeptical of the notion that customers should be able to make claims based on trades Madoff invented, even if the investors thought they were real.

“The question is whether accounts should be valued . . . based on a figment of the imagination,” Judge Pierre Leval said.

Picard, whose method of evaluating claims was endorsed last year by a federal bankruptcy judge, has only approved claims for “net losers,” investors who lost a portion of their principal investment when Madoff’s firm collapsed in December 2008.

He has rejected claims from so-called net winners, those who withdrew more than they invested with Madoff, and launched lawsuits against many of those investors to recover what he says are false profits.

As Picard watched from court Thursday, his lawyer, Baker Hostetler’s David Sheehan, told the judges that reversing his policy would divert money from investors who lost funds to those who had already made fictitious gains.

He said it would “absurd” to give “other people’s money” to net winners when some investors hadn’t yet been repaid their lost principal.

“This is a Ponzi scheme,” Sheehan said. “This is a zero-sum game.”

Full post as published by Law Blog - WSJ.com on March 04, 2011 (boomark / email).