A federal appeals court has sided with the trustee recouping money from Bernard Madoffs Ponzi scheme, ruling that Madoff customers who withdrew more than they invested so-called net winners arent eligible for reimbursements.
The judges from the Second Circuit Court of Appeals in Manhattan, in a ruling issued Tuesday, agreed with trustee Irving Picard that statements provided by Madoff to his clients were essentially worthless and should not be used to determine how much Madoffs clients should be reimbursed, if at all.
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A group of former Madoff clients has sued Picard over the trustees definition of net equity, the term Picard is using to determine how much former investors burned by the fraud might get reimbursed.
Picard has said investors who withdrew more money than they put in -- net winners -- arent eligible for reimbursement and in fact could be forced to return money, whats known as a clawback.
The trustee says only those investors who put in more than they took out are eligible to get money back.
Mr. Picard's selection of the net investment method was more consistent with the statutory definition of net equity than any other method advocated by the parties or perceived by this court, Chief U.S. Circuit Judge Dennis Jacobs wrote in the opinion.
The former customers who sued Madoff claim the trustee should use the last statement provided to them by Madoff in December of 2008, shortly before Madoff was arrested, to determine reimbursements.
Picard has argued that those statements are worthless because they represent profits and trades that Madoff admittedly fabricated.
The court agreed. Had the judges forced Picard to use those statements, the whim of the defrauder would have controlled the process that is supposed to unwind the fraud, wrote Jacob.
Picard is working in tandem with the Securities Investor Protection Corp., an industry funded entity created by Congress to reimburse defrauded investors. SIPC issued a statement Tuesday in support of the ruling.
Regarding the decision & the opinion confirms SIPCs position that the Trustees calculation does the greatest good for the greatest number of Madoff victims, consistent with the statute SIPC administers and with past precedent on the matter, SIPC wrote.
This decision will advance the prospect of making a distribution of customer property and we look forward to getting funds to (former Madoff) customers as soon as possible.
SIPC said it has distributed $780 million so far to former customers whose reimbursement claims have been approved by Picard. More than 16,000 claims have been filed in connection with Madoffs epic Ponzi scheme.
A lawyer representing the former clients, Helen Davis Chaitman, said she will appeal the ruling to the U.S. Supreme Court, according to The Wall Street Journal. Chaitman is also a former Madoff customer.
Ron Stein, president of the Network for Investor Action and Protection (NIAP), an advocacy group, issued the following statement: NIAP strongly disagrees with the appeals courts ruling, which is another blow to small investors who merely relied on the information their broker gave them. The courts regrettable decision underscores the need for Congress to reinforce securities laws that were intended to protect the small investors harmed by this decision and the actions of the SIPC Trustee.
Madoff pleaded guilty to an array of crimes related to the fraud and was sentenced in June 2009 to 150 years in prison.