JP Morgan Madoff Payment: Who’s a Victim?

Chidem Kurdas
Lines drawn between the “in” versus “out” Madoff victims in the regulator-run bankruptcy case continue to determine who benefits and who loses.

The government-appointed trustee & allied lawyers for the Madoff estate received $543 million from the over $2.55 billion settlement the U.S. attorney for the Southern District of New York obtained by threatening JP Morgan with criminal charges.

This is a Willie Sutton case—-banks are where the money is, so sue the banks. The complaint against JP Morgan is questionable at best, but banks usually settle and then pass the cost on to their customers and shareholders.

The trustee lawyers had also separately sued JP Morgan, but that civil case was thrown out and their last resort was the Supreme Court—a highly uncertain appeal. So the U.S. attorney’s settlement with the bank is a good solution for the trustee group, though $1.7 billion of the JP Morgan money is going to a Justice Department fund rather than the trustee’s fund (and another chunk to the Comptroller of the Currency).

In any event, Helen Chaitman, an attorney who was herself affected by Madoff’s fraud, filed a notice on behalf of 200 customers of the conman that they intend to opt out of the JP Morgan settlement. On the face of it this makes no sense because these people were excluded from the trustee’s class action on the ground that they are “net winners” who received their investment back. That is, they withdrew their money before Madoff ended his game in December 2008.

Thus the bankruptcy judge who approved the settlement gave the notice short shrift on the ground that the filers were not part of the class action to begin with.

However, the phrase “net winner” is misleading because the trustee clawed back whatever profits redeemers received from the scheme. Having to pay back gains from years ago that you believed were yours to spend is not easy. People had to sell their houses and other assets in a down market after the financial crisis. Famously, the owners of the New York Mets sold a stake in the team to raise money as they battled the trustee’s demand for $300 million and more. (Eventually a deal was struck for $162 million)

In view of losses from such asset sales, the so-called “net winners” whose gains were clawed back suffered hardship even though they had redeemed their investment from Madoff.

They want compensation for that hardship and since the trustee will not give them dibs on the bankruptcy estate, they want to sue JP Morgan themselves. Under the conditions of the settlement, it is not clear that they could. Neither is it clear that they can get something out of the Justice Department fund.

The previous bankruptcy judge, Burton Lifland, granted the trustee lawyers near-monopoly over Madoff lawsuits. The victims, whatever their status, were not allowed to sue anyone.

Judge Lifland, who died recently, was a great friend to post-Ponzi scheme trustees and lawyers–see Ponzi Regulation. Over the years they notched up many tens of thousands of billable hours thanks to their exclusive control of lawsuits.

Only governmental entities like the Department of Justice were able to defy this and start or threaten Madoff-related suits.


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