In the Madoff case, "net winners" could get lucky

NEW YORK, Dec 28 (Reuters Legal) – The unexpectedly rapid pace of recovery in the Madoff case — including a recent $7.2 billion settlement — has raised the prospect that the victims could actually be made whole.

It has also raised an intriguing legal question: Can the bankruptcy trustee continue to pursue assets after creditors are satisfied?

In a typical bankruptcy case, any recovery beyond what creditors are owed can be returned to the debtor. But in the Madoff case, if trustee Irving Picard is able to recover extra funds, he is certainly not going to return them to the fraudulent enterprise known as Bernard L. Madoff Securities LLC.

The Madoff case is also unusual simply because it was such an enormous Ponzi scheme that it potentially implicates many deep-pocketed litigation targets that could contribute to the recovery effort.

For bankruptcy lawyers like Dan Glosband at Goodwin Procter, who represents a variety of Madoff victims, this presents a conundrum: “Where would the money go?” he asks.

The Securities Investor Protection Act, which governs the liquidation of failed brokerages, dictates the order in which assets recovered by a trustee are distributed. But it’s silent about how any excess recovery would be allocated.


One class of Madoff investors has strong feelings about Picard’s ability to recover funds in excess of what creditors are owed. They are the so-called “net winners” — individuals and institutions that withdrew more money from the Madoff fund than they initially put in.

Picard’s view is that the net winners’ profits were merely ill-gotten gains from subsequent investors in the Ponzi scheme, and that even if they were unaware of the fraud they are not entitled to keep this money. He has sued them in an effort to recoup their profits.

Lawyers defending some net winners argue that their clients were innocent of the fraud and that they shouldn’t be obligated to disgorge their profits if Picard can collect enough from culpable parties to compensate for the lost deposits

“We would hope that Mr. Picard would focus his efforts on the parties he alleges were culpable, and put on hold suits against the thousand innocent investors he’s suing to recover profits,” said Philip Bentley at Kramer Levin Naftalis & Frankel, who represents a large group of net winners.

If Picard continues to pursue claims after making creditors whole, lawyers for net winners said they would challenge his authority to litigate such clawback suits.

On December 17, the estate of Jeffry Picower, a Palm Beach philanthropist and friend of Madoff’s who died last year, agreed to forfeit all profits that Picower had withdrawn from Madoff’s fund. The deal resolved a forfeiture proceeding initiated by the Manhattan U.S. Attorney’s office and a lawsuit filed by Picard.


If the Picower settlement is approved by the bankruptcy court in January as expected, it will bring the total sum available for Madoff victims to just under $10 billion. However, Picard is hoping to collect more money from the scores of lawsuits he’s filed against a range of institutions and individuals believed to have facilitated or profited from the fraud.

He has sued a group led by Austrian banker Sonja Kohn for $19.6 billion, HSBC Holdings Plc and a network of feeder funds for $9 billion, and JPMorgan Chase & Co for $6.4 billion, among others.

Picard estimates that losses in the Ponzi scheme amounted to approximately $20 billion. The figure is based on his controversial decision to measure losses according to the amount investors deposited into the Madoff fund less any withdrawals, rather than the fanciful amount shown on their account statements. (Those inflated numbers add up to an estimated $65 billion.)

If Picard’s decision stands — the issue is currently on appeal before the U.S. Court of Appeals for the Second Circuit — it would set a far lower target at which investors would be deemed to have been made whole.

A spokesman for Picard declined to comment. But at the time the Picower settlement was announced, a lawyer for Picard, David Sheehan at Baker & Hostetler, made a statement in a press release that suggested the trustee is not inclined to cut net winners a break.

“Those who have received other people’s money, irrespective of their knowledge of the fraud,” Sheehan said in the statement, “should return the monies to the trustee for payment to Madoff customers with valid claims who have recovered little or none of their original deposits.”

(Reporting by Andrew Longstreth of Reuters Legal; Editing by Eric Effron and Amy Stevens)

In the Madoff case, "net winners" could get lucky