Madoff as Enduring Rainmaker

Chidem Kurdas

Not many people get such a honey pot. A few weeks ago the government-appointed trustee of the Bernard Madoff bankruptcy estate applied for another round for compensation for himself and his law firm.

For the four months from December through March, they’ve billed for about $40 million but kindly provide a discount, bringing it down to $36 million. With another $12 million from prior fee applications that were held back, that makes $48 million. As they explain, they’ve “rendered substantial services to the administration of the estate during this time.” In fact it would be hard to find a time when the lawyers did not render “substantial services”—and if need be, they can always start more lawsuits and hence render additional services.

The real eye catcher is the total professional fees (including consultants as well as lawyers) that have accrued since Madoff confessed to running a Ponzi scheme in 2008 and the estate was created under the supervision of the U.S. Securities and Exchange Commission. This cumulative amount came to $1.113 billion as of the end of March, plus $50 million in miscellaneous expenses.

There is something unusual about these payments. They come from a fund collected from brokerages and meant to compensate customers for brokerage failures. From Ponzi Regulation:

“The SEC decided that a subset of Madoff investors were brokerage customers and brought in another government entity to work on the debacle. This was the Securities Investor Protection Corp. or SIPC, created by Congress to oversee failed brokerages and protect the interests of brokerage clients. …

SIPC has a reserve fund, financed with assessments collected from member brokerages, to provide financial assistance to people harmed by the failure of a brokerage. Investors identified as being in this group receive an advance of up to $500,000. This is not insurance coverage of losses but rather an up-front advance to be deducted from what is left in the estate after the customers are made whole, if that happens…..

The down side of the SIPC involvement was that it relegated a large group of victims to second-class status. The trustee and regulators agreed that the aid was only for investors who had an account with Madoff in their own name— these were regarded as brokerage customers covered by the SIPC law. But many investors had not invested directly; they had given money to feeder funds that funneled it to Madoff. The feeder funds had accounts with Madoff, not the individual investors. Therefore the latter were not protected by SIPC and the trustee refused their claims. The result was that thousands of victims had no voice or rights in the estate. ….”

The Trustee has denied 61% of the claims on the estate on the ground that these people invested via another party and hence are not brokerage customers. In short, regulators sacrificed a significant number of fraud victims by making this arrangement. But the lawyers got a fantastic deal; SIPC is known for its generosity with professional fees.

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