Reed Smith LLP on The Madoff Losses: How Will You Recover?

 
On December 11, 2008, Bernard Madoff was arrested and charged in one of the largest ever investment fraud schemes. Madoff has since pled guilty to the federal criminal charges, but still faces civil suits, class actions, and liquidation proceedings. The litigation has also spread to other “feeder fund” entities such as financial institutions, hedge funds, accounting firms, and other investment advisors involved in the auditing and vetting of Madoff investments. The estimated losses to the individuals and entities that invested with Madoff are anywhere between $24 billion and $65 billion. The estimated exposure of “feeder fund” entities alleged to have contributed to such losses is unclear. This commentary advises that “Given the extent of the losses and with litigation swirling, it is critical that investors and entities understand all potential sources of recovery, including the full extent of insurance coverage available to cover defense costs, direct losses and possible settlements and judgments.” The purpose of this commentary is to identify and examine these potential sources of recovery, as well as to provide practical guidelines for investors and entities facing exposure in the wake of the Madoff fallout.
 
The Securities Investor Protection Corporation (SIPC) provides one avenue of potential recovery for individuals and entities that invested with Madoff. It was created by Congress to assist customers of a failed brokerage firm in recovering securities such as stocks or bonds. The SIPC action against Madoff is currently pending in the U.S. District Court for the Southern District of New York, with Irving Picard as the court-appointed trustee. The deadline for claims to be filed by investors or entities seeking recovery is July 2, 2009. As discussed in greater depth in the commentary, key elements of SIPC recovery for potential claimants to consider include SIPC’s restrictions on the types of recoverable losses and the recoverable monetary limits, as well as the sources of recoverable funds within the trustee’s reach.
 
Insurance coverage provides a second avenue of potential recovery for individuals and entities that invested with Madoff, as well as a measure of protection for feeder funds facing potential exposure from the Madoff fraud. The insurance industry faces an estimated $1 to $6 billion in potential liability and losses connected to the Madoff investment fraud. Policyholders will have to aggressively pursue their insurance claims, and even litigate, to ensure they receive the benefits of the coverage they purchased. Individuals and entities that have suffered losses may turn to their first party property policies and homeowners policies, many of which provide coverage for the theft of personal items, such as cash, stocks, bonds, and securities. Feeder fund entities seeking protection against Madoff-related litigation may turn to their E&O and D&O policies, and fidelity bond coverage. As highlighted in the commentary, insurance recoveries will turn on key policy language, such as the definition of terms such as “claim” and “professional services,” as well as the presence and wording of conduct exclusions, illegal profit exclusions, prior acts exclusions, wrongful acts exclusions, and investment banking exclusions. 
 
The discovery of Madoff’s investment fraud scheme has resulted in a swift tide of legal action and time is of the essence for those seeking either recovery or protection. As the authors conclude, “With the assistance of experienced counsel, the investors and entities facing potential exposure in the wake of the Madoff investment fraud will be in the best possible position, whether their goal is maximum recoveries or protection against future suits.”