Madoff Trustee Fees Exceed Victims’ Advances

Chidem Kurdas

The way the payments from the Securities Investor Protection Corp. were going, this was inevitable. The amount paid to the Trustee group for lawyers’ fees and other expenses has outstripped the total paid by SIPC to victims of Bernard Madoff’s fraud.

SIPC was set up by Congress to help brokerage customers who lost securities or money. Brokerages pay into a fund for this purpose. Regulators decided that the Madoff estate would come under the SIPC law – not an obvious choice – and by doing so opened up the brokerage fund to the trustee and associated lawyers. The lawyers have received $832,398,090 as of the end of September and are expected to make well over $1 billion.

The victims who invested directly with Madoff were categorized as brokerage customers and hence entitled to a $500,000 advance from SIPC. As of the end of September, this group received $805,103,978 SIPC money.

The remaining investors, who invested indirectly via feeder funds, are out of luck. They were excluded by the brokerage customer definition and denied SIPC assistance. They have to rely on the feeder funds, now defunct and in receivership, to represent them in estate proceedings in bankruptcy court. Each feeder fund counts as one brokerage customer and gets up to $500,000 from SIPC, but that has to be distributed among a number of investors.

The money from SIPC is separate from the clawed back fake profits from redeemers, which the Trustee got back with little trouble and has returned in part to direct investors who lost money. A lot of that money was clawed back from the feeder funds, worsening indirect investors’ plight.

Why does SIPC pay more to the lawyers than to the victims of the fraud? The official argument is that the Trustee & Co. have to be compensated for their hard work getting money back from the redeemers and suing other parties, notably J.P. Morgan, for large sums.

It should be noted the claw-backs are straightforward and require no special legal skill. As for the interminable litigation against banks, district court judges have rejected the Trustee’s claims and he’s trying to get the Supreme Court to give him the green light.

Why does SIPC not distribute all the money to the victims and let them decide who they want to sue and for how long?

I’d wager they would’ve had no trouble hiring their own lawyers rather than relying on the – for many unwanted – services of the government-appointed Trustee. Too late now, I suppose.

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Tags: Estate, fraud, Lawyers' fees