Madoff’s ‘Indirect’ Victims May Soon See Some Payments

Madoff’s ‘Indirect’ Victims May Soon See Some Payments

 Approximately 11,000 investors who lost money in the Bernard Madoff Ponzi scheme indirectly through feeder funds, investment partnerships, bank commingled funds, family trusts, or other pooled investment accounts may soon see a recovery.

The Madoff Victim Fund (the “MVF”), which is administered by Special Master Richard C. Breeden on behalf of the U.S. Attorney’s Office for the Southern District of New York and the Department of Justice, has announced that it will begin accepting claims from these indirect victims of the Madoff fraud.

According to Breeden, the MVF is “broad and inclusive, and will vastly expand the number of investor victims who will be eligible for direct recoveries. This program will also recognize billions in investor losses that have previously not been acknowledged.” The new program is described in detail in the Frequently Asked Questions section of the MVF Web site; claim forms also are available for download.

Breeden said that he expected that approximately 2,000 direct and indirect investors will be eligible for a recovery, compared to approximately 1,000 remaining claimants in the bankruptcy proceedings. He said that “[i]n addition to this enormous expansion of the number of eligible claimants, each investor victim will generally have his or her loss measured individually, and not as part of a group. This will allow more than a thousand victims to recoup individual losses, even though they invested through a pool that had net withdrawals and was declared an ineligible claimant in bankruptcy.”

According to Breeden:

If you suffered a net loss of money that belonged to you as a result of the collapse of Madoff Securities, and you can document your loss, you will generally be eligible to recover.

Breeden said that the money in the MVF is from the $7 billion in asset forfeitures from persons involved in the fraud at Madoff Securities obtained by the U.S. Attorney’s office. “More than $5 billion of those forfeited assets were turned over to the Madoff Securities bankruptcy estate several years ago for distribution to creditors. The remaining $2.35 billion, and any forfeited assets recovered in the future, will be distributed through the MVF. The broader eligibility standards under forfeiture laws allow us to help thousands of victims who would not otherwise have a recovery.”

Madoff Securities utilized several hundred “feeder funds” and other pooled investment intermediaries to raise cash. While many of these pools were family entities with relatively small investments, several of these pools funneled billions of dollars into Madoff Securities. However, the funds in these pools ultimately belonged to thousands of investors, not to the pool or its managers. Under the MVF program, these underlying or “ultimate” investors will be eligible to recover their net losses. At the same time, the feeder funds and other pools themselves generally will not have a claim. Breeden said that MVF gives eligibility to the person whose funds were lost, not to the manager of such funds. MVF also intends to pay the victims directly to avoid any potential diversion of recoveries and to prevent funds from being affected by insolvency proceedings or litigation involving the feeder fund entities, he added.

According to Breeden, MVF will use a “cash-in, cash-out” methodology to measure loss:

We start with all your cash investments in Madoff Securities and then subtract all your withdrawals. The resulting ‘net investment’ will be your claim, less all recoveries you have already received, including payments from the SIPC or the bankruptcy trustee.

If over the years you withdrew 100% or more of the money you actually invested, you are not eligible to receive anything under MVF. These investors have fewer resources for the future than they thought they would have, since the “profits” in their account statements didn’t actually exist. However, as in other DOJ cases involving Ponzi-style frauds, MVF will only reimburse you if you lost money that you actually invested.

To participate in the program, claimants must file a claim and document their loss.

The bar date for making claims is February 28, 2014, but Breeden recommends filing earlier rather than later.

He added, that the MVF program “brings fairness and justice for thousands of victims a giant step closer to reality. MVF must still collect and evaluate thousands of claims to make sure every victim has a chance to recover, but that process will now move forward full force.”

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