Sunday, June 6, 2010

Outlook Brightens For Madoff's Victims

So, I took off my "the world is falling" hat and found something upbeat to write about today.

Once upon a time, things looked like the victimized investors in Bernie Madoff's trading programs would be completely wiped out.  Now, it appears virtually certain that a material recovery of assets is in the offing.

Last month, the estate of Jeffry Picower, an investor in Bernard Madoff's Ponzi scheme, who died last fall, is expected soon to pay at least $2 billion to other Madoff investors burned by the fraud, according to a court order.

The potential recovery from the settlement would more than double the $1.5 billion gathered so far by trustee Irving Picard, who represents investors.

A lawyer for Mr. Picard previously said in court that he might be able to recover as much as $10 billion for investors, or about half the amount they collectively lost from the fraud.  Of course, that assumes that the total size of claims is NOT the $50-$60 billion originally estimated, but closer to $20 billion as the trustee maintains.

William Zabel, a lawyer for the Picower estate, previously said the estate would hand over at least $2 billion. That is approximately the amount Mr. Picower and other entities associated with him withdrew from Mr. Madoff's investment firm in the six years before it collapsed, in December 2008, Mr. Zabel said.  The trustee has a strong claim to that money under bankruptcy law.

As a result of the virtual certainty that assets will be available to distribute, the free market has now created a mechanism for victims to get liquidity in advance of the final settlement, which still may be years in the offing.

ASM Capital, a firm which makes markets in various contingent claims, is offering either to make an immediate payment of 20% of claims in exchange for the full claim, or make an upfront payment of 16% of the claims, with the investor keeping 33% of future recoveries.  For those with claims less than $1 million, the payout could be slightly less, ASM says.

For an investor with a claim of $1 million, for example, ASM will write a check for $200,000 in exchange for the full claim; or the investor could take $160,000 plus 33% of future proceeds ASM receives above that amount.  Those sums would be in addition to any $500,000 payouts made by Securities Investor Protection Corporation (SIPC) to investors.  Any amounts covered by the SIPC, however, are thought to apply to very few investors and are expected to be limited.

If all works to Mr. Picard's plan, investors might see as much as 50 cents on the dollar.  Mr. Picard acknowledges that this is far from certain, but it is giving some investors hope.

ASM says it is working on deals with about a dozen or so Madoff investors, including individuals, charities and foundations.

As for losses, Mr. Picard has said they could top off at $20 billion or less.  But, litigation currently under way challenges Mr. Picard's methodology determining which victims of Mr. Madoff should be entitled to claims.  So far, a court has affirmed Mr. Picard's view, which yields a smaller pool.

Given these factors, victims could see anywhere from around 50 cents on the dollar (if the recovery is $10 billion and the pool $20 billion) to less than 15 cents (if the pool is considered $60 billion), Mr. Picard says.

Either way, a verified claimant today could receive a guaranteed 20% and forego the timing uncertainty.  While this is a far cry from a complete recovery, it is a far better outcome than investors could expect even a few months ago.

Marko's Take

Speaking of Ponzi schemes, there is no one bigger than our very own "Social Security".  For a 7-step solution to fix this problem, please visit our latest You Tube video blog, entitled "Social In-Security:  The Solution", by clicking here


  1. This is all good, but why don't you meet and talk with the average person who invested their money with BLMS rather than spend you time feeding us the same bull that we get from the government and Picard. Sure, some investors lost millions or billions, but that is a very small number compared to the thousands of normal average people like me that invested to save for retirement. Yes, we were getting 10% on our money year after year! But, don't tell me that I should have known something was wrong when many people were getting much higher double digit return from mutual funds and the like in late 1999 and 2000. I want Picard to follow the law and stop sighting a case from the early 1940's before the SEC and SIPC were even in existence. Picard should be ashamed of what he is doing to the everyday people who are now being victimize again by clawbacks. Any of us being sent demand letters to send back money have to pay a lawyer $600 per hour to help fight this mess. Where does it end?

  2. Hi Anon:

    The "clawback" provision is a difficult one for investors to deal with. I get that.

    I'm sure you have been told how bankruptcy law works, so I won't defend it.

    Imagine, for a second, if you had lost all your money, while someone else had gotten theirs back just a month before the scheme was exposed. Why should they be given an advantage over you?

    If you withdrew money, whether you knew it or not, you received a Net Asset Value far in excess of what was truly in existence, therefore your transaction harmed others.

    You will still be put in the pool, and get your proportional recovery. Not great, but better than zero.

    I, in no way, would imply that you "should" have known. Former clients of mine, Ivy Asset Management and Tremont Advisers, two firms that prided themselves on the quality of due diligence, were taken in. If they were fooled, anyone could be fooled, despite the red, red flags.

    I appreciate your disgust at all this mess, but the fact remains that your prospects have gotten better over time.

    Thanks for the comment.



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