Victims of jailed swindler Bernard Madoff went to court Thursday to fight the reimbursement formula created by the bankruptcy trustee recovering funds from the massive Ponzi scheme.
Lawyers representing Madoff’s former clients told a panel of appeals court judges that the trustee, Irving Picard, is side-stepping laws specifically created to reimburse victims of securities fraud.
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Picard has no choice but to use account balance figures included in the final statements sent by Madoff to his clients before his arrest in December 2008 to determine how much Madoff’s clients should be reimbursed, several lawyers argued in federal court in Manhattan.
Picard has decided that Madoff’s clients should only get back the difference between what they put into their accounts and what they withdrew, an amount referred to as ‘net equity.’
A bankruptcy judge overseeing Picard’s efforts to recover funds and liquidate Madoff’s assets has agreed with Picard’s definition of net equity.
A group of former Madoff clients sued Picard and the Securities Investor Protection Corp., which hired Picard, arguing that under the law that created SIPC the trustee has no discretion to create his own formula for reimbursing fraud victims. They are now appealing the bankruptcy judge’s ruling.
Helen Davis Chaitman, who represents several former Madoff clients, told the appeals panel that SIPC was created to provide insurance to investors and that Congress did not provide for reimbursement discretion when establishing the agency in 1970.
Karen Wagner, an attorney representing Sterling Equities, whose founding partners Fred Wilpon and Saul Katz are also owners of the New York Mets, said Madoff’s clients “are entitled to protection” under SIPC because they had a “rational belief that the statements (sent by Madoff) matched the securities they owned in good faith.”
Picard has argued that reimbursing victims based on Madoff’s statements is impossible because all of Madoff’s records have been determined to be fabricated.
The judges questioned Wagner along those lines: “Should the trustee base his decisions on whatever amounts Madoff made up while chewing on his pencil and staring at the ceiling?” asked one.
Picard’s lawyer David Sheehan was also grilled by the judges.
Sheehan defended the formula used by Picard, as well as so-called clawbacks in which Madoff clients who withdrew an amount larger than they deposited have been asked to return the difference. Picard has filed a number of lawsuits in such instances, one resulting in a $5 billion settlement by Jeffry Picower, a Florida financier and philanthropist who died in 2009.
Sterling Equities has been slapped with a clawback suit seeking $1 billion.
Sheehan said clawbacks are necessary in order to put clients who profited from Madoff’s scheme “on an equal footing” with those who lost money.
Sheehan said Picard’s investigation has revealed that Madoff was likely holding about $20 billion in his clients’ assets when his scheme collapsed and that Picard has recovered about half that amount.
Lawyers representing SIPC and the Securities Exchange Commission also argued in defense of Picard’s formula on Thursday.
The judges gave no date for when they might issue a ruling.