Madoff trustee, victims spar in court over payment

By Emily Chasan

NEW YORK (BestGrowthStock) – A federal bankruptcy judge put off a decision Tuesday on how to value the claims of investors fleeced by Bernard Madoff’s huge Ponzi scheme.

The trustee overseeing the liquidation of Madoff’s investment firm says investors’ claims should be based on how much money they put into Madoff’s scheme minus how much they took out over the years.

A number of Madoff victims are challenging the trustee’s approach, contending they are entitled to more. Many of them were in the courtroom at a hearing on Tuesday in the U.S. bankruptcy court in Manhattan,

Judge Burton Lifland told the packed courtroom that he would issue an opinion at a later date.

“There are very complex issues here. No matter how I come down and rule, it’s going to be unpalatable to some degree or another on one party or the other,” he said as he closed the hearing.

Lifland had allowed the hearing to begin 40 minutes late so that a long line of Madoff victims could get through the court’s security line.

A lawyer for the trustee argued that Madoff victims who took out money from their accounts over time — possibly beyond their original investment — should not be compensated over those who never touched their money again after giving it to Madoff.

“The fund is what’s in the pot – and what’s in the pot is the money of people who didn’t take it out,” said David Sheehan, an attorney at Baker & Hostetler LLP who is representing Irving Picard, the trustee liquidating Madoff’s securities firm under the auspices of the Securities Investor Protection Corp (SIPC).

“When you thought you were getting profits, you were getting money from another customers,” Sheehan continued.

SIPC is a nonprofit agency created by Congress in 1970 to maintain a fund to help investors with accounts at failed brokerage firms. The agency can pay a single investor a maximum of $500,000.

Sheehan argued on Tuesday that the $500,000 is not insurance, but rather, an “advance” based on the expectation that an investor has an allowable claim for securities that can later be repaid. In Madoff’s case he said, no securities were ever purchased and if every investor were paid the full SIPC amount it would be tantamount to accepting Madoff’s “phony returns.”

Sighs and groans were audible in the courtroom as the trustee’s attorney made his arguments. At one point, Judge Lifland warned observers that they could be removed from the courtroom, if they did not contain their reactions.

Madoff is serving a 150-year prison sentence for his fraud of as much as $65 billion. Britain’s Serious Fraud Office said on Tuesday it will not pursue charges against the UK arm of Madoff’s investment firm.

MONEY OUT

More than 2,000 Madoff victims had taken money out of their accounts prior to the discovery of the fraud and some of them would be unable to receive any distributions under the trustee’s plan.

A handful of lawyers for Madoff victims also addressed the court on Tuesday, saying that there was no way Madoff victims would have known they were not going to be entitled to the full $500,000 “SIPC insurance” and that accepting the trustee’s plan could derail public confidence in brokerages.

“The statute specifically contemplates that securities could be missing, could have never been purchased, and it protects customers,” Daniel Glosband, an attorney at Goodwin & Procter who represents victims, said at the hearing.

The victims’ lawyers argued it is difficult to separate “winners and losers” in the Madoff scheme as many are in the same family and that many victims are left with nothing after paying taxes based on fictitious Madoff income for years.

Some Madoff victims have proposed valuing their stakes based on amounts reflected on their November 30, 2008, account statements. At least one investor group, the Madoff Coalition for Investor Protection, said it would appeal if Lifland agrees with the trustee.

Picard said in December that he would redo every customer claim if the court decides that the method he is using to determine reimbursements is wrong. The trustee’s team has so far recovered about $1.4 billion of assets worldwide, and is looking to recover more.

SIPC, which is supporting the trustee’s method, has already committed $629 million to repaying Madoff victims, a lawyer for SIPC said at the hearing.

The case is Securities Investor Protection Corp v. Bernard L. Madoff Investment Securities LLC, U.S. Bankruptcy Court, Southern District of New York (Manhattan), No. 08-1789.

Stock Market News

(Reporting by Emily Chasan; Editing by Tim Dobbyn)

Madoff trustee, victims spar in court over payment