Chidem Kurdas
In one particular respect, government-appointed bankruptcy trustees resemble Scheherazade of the 1,001 Arabian Nights. She had a secure tenure with the Sultan as long as she kept spinning the fairy tales. Trustees are in effect guaranteed lavish pay as long as they keep suing, regardless of whether they win. So they spin those lawsuits.
The trustee of the Madoff estate has around 1,000 suits, including almost $1 billion in claims against New York Mets owners Fred Wilpon and Saul Katz, $19 billion against JP Morgan and $8.6 billion against HSBC.
Most of the claim against HSBC was recently rejected, in no uncertain terms, by US District Judge Jed Rakoff. He wrote in his ruling of the trustee’s “convoluted theories, none of which is ultimately persuasive” and “To say this argument is a stretch would be to give it more credence than it deserves.” JP Morgan has asked that the claim it faces also be thrown out, which seems likely on the basis of the Rakoff decision.
That may look like a reversal for Trustee Irving Picard and the many lawyers affiliated with him. But it does not really matter for them. They get paid anyway and have all the reason in the world to continue to sue no matter how far-fetched the case.
There is a sharp difference in the payment methods for quasi-governmental bankruptcy estate supervisors like Mr. Picard, picked and backed by regulators and ratified by courts, versus privately hired lawyers. This shows up in the cases they bring.
Had the Madoff victims received their full shares of the estate and decided to sue someone, they would have bargained to pay a significant portion of the legal fees on a contingency basis. That is, the attorneys would have been paid largely from the proceeds of a settlement.
That’s an incentive for lawyers not to start litigation unless they think there is a reasonable chance of getting a settlement and not to go with “convoluted theories” that result in charges being dismissed. Because then they would not get the contingency fee.
The Securities Investor Protection Corp., created by US Congress to protect the assets of brokerage customers, is paying the legal and administrative expenses for the Madoff estate. As of June, SIPC had paid $346.3 million total in legal fees and other administrative expenses. It also paid about $779.3 million to the Madoff victims.
But the victims have to wait for the end of the thousand lawsuits to get their full share of the estate. By all evidence, hundreds of them are unhappy about having to wait for an unknown number of years—judging from a previous similar case, it can take a decade. As long as the litigation continues, they will get only small bits of money from the estate. Their only alternative is to sell their share to outside investors at a fraction of the expected value. They have no control over Mr. Picard.
Meanwhile, the Madoff estate is fast depleting SIPC’s $2.5 billion fund. If the suits result in more money than Mr. Picard has determined to pay the victims, then SIPC can get reimbursed for the expenses.
Whether or not SIPC gets its money back, however, the lawyers are paid generously as long as they generate many billable hours–just a small portion of the payment is delayed. So they litigate and then litigate some more. Complex lawsuits equal numerous billable hours. It’s like a fairy tale for lawyers.
Tags: Bankruptcy trustees, Fred Wilpon, HSBC, Irving Picard, Mets owners Fred Wilpon and Saul Katz, New York Mets, Saul Katz, SIPC, US District Judge Jed Rakoff
HedgeFundSmarts 
August 18, 2011 at 5:23 pm
[…] With Mr. Picard controlling the litigation, if the proceeds are more than the $17.3 billion principal lost, the rest will go not to the victims but to reimburse the Securities Investor Protection Corp., which is paying the legal and administrative expenses. What it means is that SIPC pays Mr. Picard and associated lawyers along the way, then gets the money back. But the bankruptcy judge has opined that there is no reasonable expectation that SIPC will recoup the legal expenditures. As I wrote before, the estate lawyers get paid for litigation whether or not they succeed. […]