Favored Madoff Victims Near Half Mark

Chidem Kurdas

Yesterday, the government-appointed trustee for the Madoff bankruptcy estate announced a fourth distribution of money to what the affiliated lawyers refer to as “allowed” claims.

With the new distribution, the allowed claims will have received nearly $6 billion of the more than $17 billion the conman took in over decades, accounting for 46% of the losses to this specific group of victims. While that may sound impressive, there is another story behind those numbers.

Allowed claims belong to people who invested with Madoff directly. These are the favored ones. Thousands of others who invested through feeder funds – and were defrauded just the same – are denied the right to distributions from the estate. The feeder funds’ claims are recognized and clients of feeder funds have to wait for the fund to get the money and then divide it among them.

But the feeder funds themselves are defunct. Their remnants are in bankruptcy. Why does the estate not pay the clients directly?

This bizarre situation came about because the U.S. Securities and Exchange Commission decided that the estate would be put under a certain law after Madoff came out and confessed his massive scam in December 2008. This is the Securities Investor Protection Act, enacted by Congress to help brokerage customers who’ve lost securities. For the full story of the SEC and fraud, click for my book

Since the feeder fund clients were not directly customers of Madoff’s brokerage, they were left out in the cold. Under a regular receivership, no such distinction would have been made between direct vs. indirect investors.

By picking SIPA, the SEC opened to the Madoff estate the fund meant for brokerage customers. While that provided some compensation for the allowed investors, it provided more to the alliance of lawyers around the trustee.

The trustee, Irving Picard, is himself is a former SEC official. He’s gone through a special sort of revolving door. He and his allies have found legal Nirvana in post-fraud bankruptcy.

As for the not-allowed Madoff victims, they’ve found themselves on the wrong side of a line drawn by regulators.

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Tags: Bernard Madoff, Ponzi scheme