Madoff Victims Getting Unexpected Restitution, but Fairly?

business_ethics_highlights_2Is this a rare ray of sunshine a decade after the collapse of the biggest Ponzi scheme of all time? The bankruptcy trustee overseeing the liquidation of Bernie Madoff‘s firm has recovered an astounding 70% of approved claims for principal invested with Madoff—several multiples of what is typical in the aftermath of Ponzi schemes.

So far, so good. However, a significant proportion of those funds were recovered in litigation from parties that weren’t in on Madoff’s scheme. Bankruptcy trustee Irving Picard’s recovery strategy is targeting Madoff customers who withdrew from their accounts with Madoff more money than they had put in. To the extent that these parties weren’t in on the scheme and were withdrawing funds in the good-faith belief that the profits Madoff recorded in their accounts (to cover up his scheme) were in fact earned in legitimate financial transactions, it raises a question about the fairness of seeking to recover those profits: Why should innocent parties who were also manipulated by Madoff, but to their financial benefit, disgorge their profits to other innocent parties who were manipulated by Madoff to their financial detriment?

An analogy from law illustrates why this is an important question: The common law distinguishes among buyers of stolen goods. Those who knowingly buy stolen goods are subject to recovery of those goods by rightful owners. When it comes to those who unknowingly buy stolen goods, the common law distinguishes between those who are bona fide purchasers for value – roughly, those who paid a market price for the goods – and those who are not (because they paid a sub-market price for the goods). Bona fide purchasers for value are protected from recovery efforts by rightful owners, but non-purchasers for value are vulnerable to recovery efforts by rightful owners.

Armed with the analogy to the common law’s treatment of unknowing purchasers of stolen goods, we can ask whether those who in good faith withdrew profits from Madoff-managed accounts are more like bona fide purchasers for value or more like those who bought stolen goods innocently, but at a sub-market price. What considerations should incline us to classify them one way as against the other? >>>

LINK: Madoff’s Victims Are Close to Getting Their $19 Billion Back (by Erik Larson and Christopher Cannon for Bloomberg)

. . . While no one will ever collect the phantom profits Madoff pretended he was earning, the cash deposits by his clients have been the primary objective for Irving Picard, a New York lawyer overseeing liquidation of Madoff’s firm in bankruptcy court. So far he’s recovered $13.3 billion—about 70 percent of approved claims—by suing those who profited from the scheme, knowingly or not. . . .

“That kind of recovery is extraordinary and atypical,” said Kathy Bazoian Phelps, a bankruptcy lawyer at Diamond McCarthy LLP in Los Angeles who isn’t involved in the case. Recoveries in Ponzi schemes range from 5 percent to 30 percent, and many victims don’t get anything, Phelps said.

After the initial chaos following Madoff’s arrest, Picard has focused on a simple formula to recover principal cash for victims: Suing customers who withdrew more money than they put in. The strategy sparked controversy but was ultimately blessed by the courts.

Just last month, Picard’s lawyers asked a U.S. appeals court to revive about 80 such lawsuits in which he’s seeking up to $4 billion—perhaps the last big chunk of money available in the case. A lower court threw the suits out two years ago, ruling the money was beyond the trustee’s jurisdiction because it had been been transferred from feeder funds to foreign banks before Madoff’s arrest.

If Picard wins the appeal and succeeds in all of those cases—an outcome he called “aspirational”—he’d boost recovery for victims to 91 percent of the lost principal, which could change depending on investor claims accepted or adjusted by the trustee.

Investors who weren’t direct Madoff customers—those who invested through feeder funds or money managers—weren’t allowed to file claims with Picard to recover their share of the cash principal. For them, the Department of Justice set up a separate $4 billion fund to compensate for some losses.

What do you think?


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