Irving Picard, the bankruptcy trustee charged with recouping funds for victims of Bernard Madoffs vast fraud, began his mission just over two years ago with the potential to emerge as a hero.
That would have made him a rarity among the long list of financiers, CEOs and politicians blamed for dragging the U.S. economy into the gutter and obliterating the savings of millions of Americans along the way. Think of Madoff and Allen Stanford, once prominent Wall Street wizards now accused of stealing billions; subprime mortgage king Angelo Mozilo, the former CEO of Countrywide Financial; Congressman Barney Frank, patron saint of teetering home loan giants Fannie Mae and Freddie Mac; and, in some people's minds, just about anyone employed by Goldman Sachs (NYSE:GS).
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Like a new sheriff, Picard was going to ride into town and clean up the considerable mess left by Madoff, widely viewed as the biggest scoundrel of all.
But that hasnt been the case.
Instead, among the many thousands of former Madoff clients who lost their lifes savings in the fraud and who may never see a dime in return, Picards name has been added to the list of bad guys.
Picard says he has recovered $7.6 billion from the scheme, $5 billion of it in a lump sum from the estate of now deceased financier and Madoff associate Jeffry Picower. As of March 31, Picard said he had reviewed more than 16,000 claims and approved some 2,400. For his efforts, Picard has been paid a considerable amount of money: $3.6 million to him and nearly $150 million to his firm, Baker & Hostetler, according to Reuters.
Picards fees are just part of the story, however.
In a nutshell, heres the broader case against him: his critics say hes nothing more than a bag man for the Securities Investor Protections Corp. [SIPC], the entity mandated by Congress in 1970 to reimburse investors if a brokerage firm goes belly up.
SIPC, according to its critics, never actually had enough money to reimburse victims for a fraud the size of Madoffs epic Ponzi scheme and Picard was specifically hired to prevent them from ever having to.
Picard has so far succeeded in that mission largely by insisting that Madoffs former clients be reimbursed, if at all, not according to the last financial statements they received shortly before Madoff was arrested, but through a method created by Picard and dubbed net equity.
The net equity formula has not only allowed Picard to reject thousands of Madoff-related claims, but also charge tens of millions in legal fees for the hours he and his staff have poured over financial statements to determine whether and how much former clients should be reimbursed.
Timothy Murray, whose family lost their savings in the Madoff fraud, explained the position of those who first lost their money to Madoff and then their faith in Picard and SIPC.
When SIPC was faced with a large liquidation in the Madoff case SIPC and their trustee devised a never-before-used method to determine claims to protect the SIPC fund from depletion, he said.
Instead of using the final brokerage statement as required by (the law that created SIPC) they choose to calculate the deposits and withdrawals for each and every account going back decades and in many cases spanning generations of families, Murray added.
This method denies coverage to the majority of account holders while saving SIPC a fortune. It is also the most lawyer intensive method, as you know, racking up hundreds of millions in fees and expenses, making this trustee and his law firm the biggest net winners of the failures of our regulators to stop the Madoff fraud.
Like many critics of Picard and SIPC, Murray was critical of SIPC for charging its members the nations largest banking and brokerage firms an annual fee of $150. That fee then allowed those brokerages to advertise to potential clients that their accounts were insured up to $500,000.
In other words, for $150 a year the big Wall Street brokerages got to attract large numbers of clients by claiming to provide an adequate form of insurance if something went awry. Not a bad deal.
The reality, however, was that the SIPC fund, which totaled about $1 billion at the time Madoff was arrested in December 2008, was far too small to cover such a massive debacle.
The $150 per year fee was not even adequate to print the stickers that brokers display in their windows in every office across the country, said Murray.
Only after the Madoff fraud was exposed did SIPC increase the premium it charges its members to 0.25% of a firms net operating revenue.
Ron Stein, president of the Network for Investor Action and Protection, an advocacy group that formed after Madoffs fraud unraveled, said SIPC has refused to honor their Congressional mandate and tossed investors aside in order to protect its own fund.
Stein said the stakes are high in the debate over Picards methods. These actions represent a further attack on investor confidence in this country, he said.
Murray, Stein and others have spoken loudly enough that Congressman Scott Garrett (R-N.J.) is seeking a formal review of Picards methods by the Government Accountability Office. In a four-page letter delivered earlier this month to the head of the watchdog agency, Garrett and three other members of Congress raise what they describe as serious concerns for the net equity method, especially when it requires former Madoff clients to return money to Picard, whats known as a clawback.
The lawmakers want the GAO to look into how Picard was hired and whether his appointment by SIPC is a conflict of interest in that Picard is being paid by the same entity whose money is ultimately at stake when Picard decides who will and who wont be reimbursed.
Garrett and the others also want the GAO to review Picards decision to use his net equity formula, which they describe as much more lawyer-intensive. (Lawyer-intensive can be read to mean "fee generating.) Finally, SIPC has been asked to turn over all compensation records for Picard and his right-hand man, attorney David Sheehan.
A spokesman for Picard, Sheehan and SIPC referred FOXBusiness.com to documents sent by SIPC to Garretts office in January in response to a request for information by the Congressman. The spokesman declined any further comment.
In those documents, SIPC noted that Picard and his attorneys are mindful of the human toll of (clawback) lawsuits, and have used discretion and compassion in dealing with the unprecedented realities presented by the largest Ponzi scheme in history.
Picard, mostly through Sheehan, has insisted that his net equity method is the only reimbursement formula that makes sense. Profits recorded through Madoffs paperwork are phantom profits, according to Picard, because Madoff created his paperwork out of thin air to match his phony results.
Numerous Madoff victims have sued Picard and the net equity matter is under review in Federal Court, where judges are expected to rule any day.
Meanwhile, a GAO spokesman said Garretts request is under review.
Murray said an investigation of SIPC and Picard is long overdue.
Clearly the SIPC's and their trustee's actions, with the acquiescence of the Securities and Exchange Commission, the very agency that allowed this fraud to continue and grow to unprecedented levels, are in direct conflict with laws meant to protect small investors, he said.