Agency liquidating Bernard Madoff’s brokerage says the $2.6 billion it has on hand is enough to satisfy all legitimate claims by victims of the money

“I have confidence there is sufficient money at SIPC to satisfy all claims,” he said in a phone interview.

Agency liquidating Bernard Madoff’s brokerage says the $2.6 billion it has on hand is enough to satisfy all legitimate claims by victims of the money manager’s $65 billion Ponzi scheme. The Securities Investor Protection Corp. is using a formula that investors may challenge in court. The agency has the money in an industry-financed fund and from recovered assets to reimburse Madoff’s 5,000 customers to the maximum allowed by its charter, Stephen Harbeck, SIPC president, said in an interview. The SIPC has $1.6 billion in a fund designed to reimburse customers as much as $500,000 on lost investments, plus $1 billion recovered by brokerage trustee Irving Picard from Madoff firm bank accounts and desk drawers, Harbeck said. Madoff, 70, is in jail facing a 150-year sentence after pleading guilty March 12 to using money from new investors to pay off old ones in a global fraud that snared investors as varied as filmmaker Steven Spielberg and New York University. Prosecutors are seeking $170 billion in forfeitures from him, representing funds that flowed through his company. They have identified more than $100 million of his houses, cars, boats and jewelry they intend to seize. Some Madoff investors are up in arms about SIPC’s decision, announced by Picard at a Feb. 20 creditors’ meeting, to limit victim claims to “net equity” -- cash invested minus sums taken out. That formula ignores profit reported on customer brokerage statements for the past 20 years, gains that were fictitious because Picard found no evidence Madoff had made any trades or profits going back decades. Customers paid taxes on those phantom profits and “legitimately expected” that they owned the securities listed in official brokerage statements, said Helen Chaitman, a Madoff victim and lawyer with Phillips Nizer LLP who is advising 350 investors in the fraud without charge. The Securities Investor Protection Act, passed in 1970 to safeguard investor accounts and maintain confidence in the market, encourages SIPC to honor customers’ “reasonable expectations” by compensating them for lost profit as well as principal, said Chaitman, other victims and legal experts. In a similar case, involving a fraud at bankrupt New Times Securities Services Inc., a federal judge in New York, where Madoff’s firm is based, ordered SIPC in 2002 to pay $500,000 to customers whose statements reported nonexistent trades by actual mutual funds. An appeals court reversed that ruling in a 2004 precedent that Picard relies on. “Picard is behaving like a true insurance representative,” said Chaitman, who said she lost her “entire retirement” by investing with Madoff. “SIPC is being creative about not having to pay people the money to which they’re entitled.” Groups of victims and their lawyers are debating whether to seek a declaratory judgment in court that Picard is misinterpreting the law or a lawsuit to bar him from using his current formula to pay claims, said Lawrence Velvel, a customer who is dean of the Massachusetts School of Law. “There will be challenges to what Picard is doing,” said Velvel, who said he lost “a large chunk of savings” in the Ponzi scheme. “The only question is timing.”

The Biondi family partnership, which lost “under $1 million” with Madoff, hasn’t filed a claim with SIPC yet, said Adriane Biondi, 41, who lives with a friend in Florida after losing all her money. “We need to understand our strategies,” said Biondi, part of a group being advised by Chaitman.

Leading Precedent In the New Times case, a federal district court said investors were entitled to maximum $500,000 payments from SIPC if statements reflected investments in genuine mutual funds, while customers whose records cited fictitious mutual funds were only entitled to $100,000, the SIPC limit for cash initially invested.
In its 2004 ruling, the federal appeals court disagreed, finding customers should get back money they invested and not “artificial” returns reported in “fictitious account statements.” It adopted an argument by the U.S. Securities and Exchange Commission, which exercises oversight, that SIPC would be “unacceptably exposed” if it had to pay customers “arbitrary amounts that necessarily have no relation to reality.” Biondi said she understood SIPC protection as a form of insurance that covered her family partnership losses. “Now they’re going to deduct money from my claim,” she said. “If you were to pay her based on fictitious, phony profits, there would be less money to distribute to someone who has lost principal,” Harbeck said. To date, Picard has authorized payments to 12 claimants of $500,000 each, according to his Web site, www.madofftrustee.com. Chaitman asked Picard and Harbeck, in a March 26 e-mail, “that you post on your Web site on a daily basis the number of claims that you have received, the number of claims you have processed, and the amount of funds SIPC has paid out.”

“In view of the desperate financial circumstances of many of the investors, we would like to know your position on establishing an expedited procedure for paying investors the sums to which they are entitled,” she said in the e-mail.

Sharon Lissauer, a multilingual former model for Leggs Pantyhose who lost her savings from modeling and her inheritance from her mother in a Madoff account, is seeking work to pay her bills while waiting for a letter from Picard that will entitle her to some payment. “There’s been no letter yet,” she said. “Modeling is slow, and I’m having trouble paying my bills.” Jonathan Landers, a lawyer with Milberg LLP, which represents more than 70 victims, said he’ll probably wait until Picard rejects a client’s claim before taking legal action. Courts are reluctant to render advisory opinions and “often get bogged down in questions of whether the case is ripe for decision,” he said. “We are going to wait until we have an actual case with a flesh and blood person to present to the court,” he said. “The court will then face the issue squarely.” He isn’t planning a group lawsuit, or class action, although some groups may join his clients’ effort later, he said. Meanwhile, Milberg plans to file a petition to force Bernard Madoff into personal bankruptcy, Landers said. While Madoff’s company is being liquidated by Picard, the convicted fraudster isn’t in his own bankruptcy proceedings. Lander’s theory: Under bankruptcy law, it may be easier to reach Madoff’s assets that have been transferred to his family or friends, he said. Landers’ advice to his clients has been to file a claim for what is owed according to the last customer statement, including reinvested profits. One of his clients, part of an informal committee of victims, has a $30 million claim. 31 Picard’s rule that payouts will equal cash invested minus cash taken out would unfairly penalize Madoff clients who withdrew funds to pay taxes on reported profit, as well as older investors with IRAs who were forced by law to start withdrawing money when they turned 71, he said. Some customers are “petrified” of Picard’s plan to seek so-called clawbacks on money they took out over the years that exceeded their principal, Chaitman said. “In dire need,” such customers aren’t filing claims in case information they provide gives Picard a “roadmap to clawbacks”, she said. Under New York law, Picard can seek return of redeemed false profits going back six years. Picard’s counsel David Sheehan said at the February creditors’ meeting. “It was all made-up profit” he said. “So you got somebody else’s money.” Kevin McCue, a spokesman for Picard at the law firm Baker Hostetler LLP in New York, didn’t have an immediate response to requests for comment on investor complaints.