March 6, 2021

Court Sides With Trustee Over Madoff Payouts

A federal appeals court has approved the method being used to calculate the losses incurred by the victims of Bernard L. Madoff’s global Ponzi scheme, saying the approach used by the trustee in the case is “legally sound in light of the circumstances of this case and the relevant statutory language.”

The ruling, by the United States Court of Appeals for the Second Circuit, is a significant victory for Irving H. Picard, the court-appointed trustee who is liquidating the Madoff firm in bankruptcy court in Manhattan. In the face of vocal opposition in the courts and among some in Congress, Mr. Picard had calculated victims’ losses under the “cash in, cash out” method, which relied on the difference between the cash invested and the cash withdrawn by investors, without giving any weight to the fictional profits shown on the victims’ account statements over the years.

The favorable ruling in the closely watched dispute probably will advance the day when claims for the eligible victims in the case can be paid from the $10 billion pool of assets already collected by Mr. Picard. Those payments had been held in abeyance by the legal dispute over Mr. Picard’s calculation method.

But the decision is a setback for the thousands of so-called “net winners” in the vast Madoff fraud, investors whose withdrawals from the Ponzi scheme over the years matched or exceeded the amount they originally invested.

Lawyers for those investors had urged the courts to throw out Mr. Picard’s method and order him to rely instead on the final account balances shown on the their statements in the weeks before the fraud collapsed with Mr. Madoff’s arrest on Dec. 11, 2008. Some members of Congress had supported their fight, proposing legislation that would take the dispute out of the courts by changing the laws governing Wall Street bankruptcies and Ponzi scheme loss calculations.

The ruling supports the trustee’s efforts to recover fictional profits that investors withdrew from the sceme before its collapse through so-called “clawback” lawsuits.

Amanda Remus, a spokeswoman for Mr. Picard, released a statement saying the decision “is an important step forward for customers with allowed claims. We have maintained all along that our definition of net equity — which is supported by longstanding precedents in bankruptcy and securities laws — is the fairest approach to the determination of claims, and we hope that the Court’s decision can be the final word on this issue.”

  One of the lawyers opposing Mr. Picard’s approach to calculating losses, Helen Davis Chaitman, predicted the appeals court ruling “will destroy investor confidence in the capital markets” because it does not require the Securities Investors Protection Corporation, the industry-supported organization that provides a limited safety net for customers of failed brokerage firms, to honor the Madoff investors’ final account statements.  

“The message to every American who invests in the stock market is clear: invest at your own risk and assume that S.I.P.C. insurance does not exist,” Ms. Chaitman said.

  An investor advocacy group initially formed by those opposing Mr. Picard’s loss calculation formula also criticized the ruling. Ron Stein, the president of the Network for Investor Action and Protection, said the ruling “is another blow to small investors who merely relied on the information their broker gave them.” Mr. Stein continued: “The court’s regrettable decision underscores the need for Congress to reinforce securities laws that were intended to protect the small investors harmed by this decision and the actions of the S.I.P.C. trustee.”

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