In what is perhaps a predictable move, the federal bankruptcy judge overseeing the ruins of Bernie Madoff’s investment empire approved the contentious method used by trustee to calculate victim losses.
The New York Times reports that Bankruptcy Judge Lifland ruled that the individual investors’ losses should be defined as the difference between the cash paid into a Madoff account and the amount withdrawn before the fraud collapsed in mid-December 2008.
This ruling decidedly disadvantages the investors who argued that their claims should be valued on the balances shown on their final account statements. The result is a significantly reduced claim amount that duped investors might be able to recover.
It is a harsh result, but the reasoning makes some sense. Ultimately, this is a Ponzi scheme, which by its nature is a fraudulent endeavor. Because of this, the final account statements upon which investors relied cannot reflect legitimate “securities positions” for claim valuation.
The trustee and the investors/creditors do not have the same goal in the Madoff case. The trustee has a duty to maximize the value of the bankrupt estate for the benefit of all creditors. The individual creditors are, rightly so, motivated by their self-interest. The trustee is looking to bring as much property into the estate as possible, and remedies are only as good as the evidence. At the end of the day, the existence of a Ponzi scheme thwarts investor efforts.
In the Madoff case, the bankruptcy trustee calculated investor losses to determine whether an investor had a valid claim in the bankruptcy or whether there are funds that can be recovered by the estate. Such determinations not only positioned the mob of unsecured creditors against each other (old investors with potentially legitimate profits vs. new investors who bought in when the scheme was in full swing), but also left the trustee with few allies in the quest for assets.
Indeed, while investor “restitution” in many Ponzi schemes uses the “cash in, cash out” method, Madoff isn’t the average Ponzi scheme. Ponzi schemes do not have an average shelf-life to measure; the Madoff scam spanned more than a decade (and perhaps dates as far back as the 1980s) and came to a crashing end with an estimated $65 billion in losses. Madoff’s approach involved the purchase of blue-chip stocks and then taking options contracts on them to limit losses. Madoff did not promise unmatched profits to the countless investors who placed money with his investment firm. Rather, he offered more modest and consistent gains to elite clients usually at a rate of 10%. Many Ponzi schemes promise to deliver returns of 20% or more, but Madoff’s more restrained output contributed to the fraud’s longevity. This strategy of steady returns was often described as “too complicated for outsiders to understand,” since Madoff was reluctant to give details on how the investments worked.
Judge Lifland acknowledged that “the complex and unique facts of Madoff’s massive Ponzi scheme” defied any simple analysis. “It would be simply absurd to credit the fraud and legitimize the phantom world created by Madoff” when determining victim losses, he said.
No doubt the issue will wind its way up to the Second Circuit – the investors are many and they are angry. A case can run with that momentum almost indefinitely.
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