David Iselin’s experience as an investor with, and later as a victim of, Bernard Madoff’s massive financial fraud can be summed up in a few words: nothing is as it seems.

Prior to Madoff’s arrest in December 2008 the phrase made perfect sense. It is, after all, a con man’s job to create illusions. For over two decades, Madoff was a master at creating illusions.

What bothers Iselin now -- almost three years to the day since Madoff was sentenced to 150 years in prison -- is that the phrase remains as applicable to his life today as it was when Madoff was dutifully sending him quarterly statements listing the phony stock trades that supposedly created all those steady profits.

In the peculiar vernacular of the Madoff investigation, Iselin, a 65-year-old retiree from White Plains, N.Y., is a "net winner." Which, according to a financial equation devised by Madoff bankruptcy trustee Irving Picard, means that over the years Iselin withdrew more from his Madoff account than he invested. Consequently, he isn’t eligible to receive compensation from the pool of money recovered from the fraud. What’s more, he could be facing a clawback of money he pulled from his account years ago, money the bankruptcy trustee has determined is false profit.

Iselin has found it hard to reconcile that legal concept with his own reality in which much of his life’s savings and a good chunk of his retirement fund has been lost to Madoff’s lies.

“The whole thing has been very confusing. I’ve felt attacked for three and a half years and I’m in the position now where I have to have a lawyer I pay all the time,” he said in a recent interview. “I figured the purpose of an investigation into Madoff would be to attack people who knew it was a fraud. Not to attack the victims.”

Iselin is hardly alone in his belief that Madoff’s arrest, rather than representing an end to the decades-long fraud, instead launched a whole new painful journey whose end is nowhere in sight.

Trustee’s Tenure Controversial From the Start: Conflicts of Interest?

At the helm of this new journey is Picard, the trustee appointed by the Securities Investor Protection Corp. [SIPC] to unwind Madoff’s multi-billion dollar Ponzi scheme.

Picard’s tenure as trustee has been controversial almost from the start, fraught, according to his critics, with seeming conflicts of interest that appear to put his financial interests ahead of those he’s supposed to be representing – namely the thousands of innocent people caught up in Madoff’s fraud.

For instance, just days after Picard was named Madoff trustee in late 2008 he left the New Jersey law firm where he was a partner and joined the larger and more prestigious firm of Baker Hostetler, also as a partner.

“Certainly red flags were raised in the minds of many when he transferred to his new firm as a partner with a lucrative pay package shortly after being named Madoff trustee,” said Chicago-based securities attorney Andrew Stoltmann. “The perception is that the Madoff victims were being used as pawns for him to enrich himself.”

That was just the beginning.

Arguably the most controversial aspect of Picard’s tenure as Madoff trustee was his decision to use the net equity formula in which former Madoff clients deemed eligible for compensation would only receive the difference between what they invested and what they withdrew from their accounts.

Many former Madoff clients have challenged that decision, arguing in lawsuits that they are entitled by legal precedent to receive whatever their account balances showed on their final statements from Madoff. The courts have yet to issue a final ruling on the matter.

Entirely separate from the argument over victim compensation amounts is the net equity method itself, hugely labor intensive and time consuming, requiring hours of investigative and forensic accounting to determine how much an investor paid into and withdrew from a Madoff account often over a period of several decades. In contrast, the method favored by former Madoff clients would require far less effort, not much more than tracking down clients’ final statements issued by Madoff.

Consider also the many hours Picard and his team of lawyers have spent arguing the legitimacy of their net equity formula before judges and appeals courts. (And net equity is just one among several legal cases Picard has battled related to his Madoff tactics.)

$554 Million in Administrative Expenses

Now consider these figures: as of June 1 the trustee had reimbursed former Madoff clients a total of $332.6 million. Meanwhile, the trustee listed his total administrative expenses as of March 31 at $554 million. According to the trustee’s public filings, Picard himself has earned $5.1 million from his Madoff efforts.

That means legal expenses related to the case have cost $221.4 million more than Picard has so far turned over to Madoff’s victims. (The victims have also been reimbursed about $800 million in insurance claims paid out by SIPC.)

By Picard’s own account, the fees could top $1 billion by 2014.

Stoltmann, who is not involved in any Madoff-related litigation, said he believes the criticism targeting the trustee is justified.  

“You’ve had an orgy of expenses without the corresponding results you’d expect,” the attorney said. “There’s certainly the perception that Picard is running up the meter at the expense of paying out the victims.”

In fairness to Picard it should be noted that the trustee has amassed over $9 billion in recoveries and settlements of which only $2.3 billion is available to be released to victims because much of the rest (about $6.5 billion) has been tied up in lawsuits and reserves.

Still, Picard’s critics note that more than half of the total amount recovered so far -- or $5 billion -- arrived in a single settlement with big Madoff investor Jeffry Picower, a settlement reached with considerable help from the U.S. Attorney’s office.

Picard’s critics also say the reason so much of the $9 billion in recoveries is tied up in litigation is due solely to Picard’s controversial methods for unwinding the fraud.

Madoff Fraud “Most Complex and Far Reaching in History”

Through his representatives, Picard declined to comment. But Amanda Remus, a spokesman for Baker Hostetler, provided an e-mailed statement that offers a lengthy defense of the trustee’s practices against charges of conflicts of interest.

Against the charge that Picard leveraged his position as Madoff trustee to corral a more lucrative offer at a bigger law firm, the statement countered that Picard “is a contract partner, not an equity partner, at Baker Hostetler, meaning he does not have an ownership interest in the firm.” In addition, “as trustee, (Picard’s) compensation is not on a commission basis, as provided in the Bankruptcy Code.”

In other words, Picard doesn’t get paid more if he generates other fees for the firm related to the Madoff liquidation.

Against the charge that Picard’s controversial methods have led to extensive delays in payments to victims and thus larger fees for his firm, the statement said; “…the truth behind the delay in additional distributions from the Customer Fund is simple: the appeals of two claimants, represented by several class-action lawyers are responsible for holding up the distribution of more than $5 billion.”

Elsewhere, the statement added: “It is also important to remember that the fraud confronting (Picard) is probably the most complex and far reaching in history, stretching over several decades and throughout the global financial community. Billions of dollars are at stake, as reflected in the recoveries and settlements achieved to date.”

The statement noted, accurately enough, that neither Madoff nor any of his alleged accomplices has volunteered to help Picard make sense of decades of fraudulent account statements and phony trading records.

“Also, working against (Picard) is a large contingent of law firms and accountants seeking to deny the SIPA Trustee the ability to recover these funds from their clients. The SIPA Trustee therefore had to assemble a team that is equipped to take on these tasks and see them to their conclusion,” the statement concluded.

As for the legality of net equity itself, Remus noted in an e-mail that both the Second Circuit Court of Appeals and the U.S. Bankruptcy Court have upheld Picard’s position, and the U.S. Supreme Court is expected to issue a ruling on the formula by the end of June, she said.

Picard’s critics aren’t easily assuaged, however.

The acrimony that exists between many Madoff victims and Picard is a result of the “radically problematic approach” taken by the trustee, “one that traumatizes so many investors and has forced a very adversarial relationship between the victims and Picard,” said Ron Stein, president the Network for Investor Action & Protection, an advocacy group that sprung up in the wake of the Madoff scandal.

Stein said Picard has “no economic incentive to shorten the process and I assume he’s going to continue to drag this out and torture the victims.”

'Something that Resembles Justice'

Iselin, the former Madoff client, is resigned to the long haul. He’s adjusted his life to the new reality. Instead of retiring to his home in the Berkshires in Western Massachusetts, Iselin rents the property now and uses the income to pay living expenses. Among those expenses is $700 a month to his lawyer, adding to the $24,000 he has already paid out in Madoff-related legal fees.

Perhaps the most painful aspect of the entire experience, according to Iselin, has been the jarring sense that he and other victims of the fraud deemed net winners by Picard have been lumped into the same group as investors like Picower and New York-based J. Ezra Merkin, powerful and savvy financiers who are widely believed to have turned a blind eye to Madoff’s fraud in order to reap many millions in profits.

“It’s very important that people understand there are people like me who just happened to be in the wrong place at the wrong time,” said Iselin, who came across Madoff in 1990 through friends of his father-in-law.

Now Iselin goes about his life hoping for an end to his Madoff struggles but not especially hopeful of one.

“It’s been going on for three and a half years and it doesn’t seem to have any end in sight,” he said. “In the end I would certainly like to see something that resembles justice.”

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