Madoff victims are half way toward getting the money they put into the world’s largest ponzi scheme back.
Last week, I wrote a post saying that based on my calculations victims of Bernie Madoff would end up getting much more of their money back than was originally thought. They might even break even. I got a lot of flack from people who had lost money and thought bankruptcy trustee Irving Picard is not being fair. But mostly people said the idea that Madoff victims would get their money back was ridiculous. One reader wrote in that it was the “worst piece of trash that has ever been written about Madoff.” Another blogger Felix Salmon wrote:
What’s even less probable than the government breaking even on its AIG bailout? How about Bernie Madoff’s investors getting all their money back? That’s what Stephen Gandel reckons might happen.
On Friday, Madoff trustee Irving Picard and other law enforcement officials recovered for Madoff victims $7.2 billion, which is the largest single forfeiture in American judicial history to help pay back victims of Bernie’s fraud. The money comes from Jeffry Picower, who initially invested in Madoff back in the 1970s and who pulled out much more money than he ever put in. Now, it looks like my “reckoning” looks a whole lot closer to reality than Salmon and others thought. Here’s why:
Picard figures that investors lost $20 billion in the Madoff scheme. That’s money they put in. Not the $60 billion or so that their statements said they had when Madoff turned himself in. Picard has already collected $2.3 billion. The latest settlement brings his current total up to $9.5 billion. That means if Picard were to distribute the money he has now, every investor would already get 45% of the money they put in Madoff back. The biggest portion of that money would be going to people who invested in Madoff through the feeder funds, who were not covered by SIPC and so have not got any money toward their losses so far. Those people are still entitled to a portion of what Picard recovers.
What’s the likelihood that Madoff investors would get all of their money back. According to an article in the New York Times, some investors figured Madoff claims were worth 80% of the original investment. Picard has an additional $43 billion in claims outstanding. To be sure, these claims are harder to collect on than Picower. Picard is seeking $20 billion from Sonja Kohn and her firm Bank Medici, which was merely a front for Madoff. So the likelihood is that there isn’t much money there. Picard is seeking most of the rest of the money from banks like HSBC, J.P. Morgan Chase and UBS. They will be less willing to pay than Picower’s widow. (Jeffry drowned in a pool last year.) Let’s say they settle at 30%, which is conservative given Picard was ableto get Picower’s estate to pay out 100% of what was sought. That adds another $6 billion. Then there are some of Madoff’s most notorious feeder funds. Picard is seeking $3.6 billion from Fairfield Greenwich, for instance. Presumably the cases against those funds are the same or even better than Picower’s. Throw in some $200 million that Picard is seeking from family members and $80 million from Madoff’s London opperations, and you are pretty close to getting to that break even point.
Of course, even if Picard recovers $20 billion or more, this only makes up the money that investor put into the fraud. And Picard is only paying people back, at least initially, the money that people put in, not what they thought they had. (Although if he gets more than $20 billion, and clears his expenses, then people would get start to get some of their fictitious gains back, essentially making money on a ponzi scheme.) This is why some people have claimed that Picard is being unfair. And in some instances I can see where Picard’s methods may seem unfair. Consider the person who put in $100,000 directly into Madoff and had a statement that said their account was worth $1,000,000 in December 2008. The Securities Investor Protection Corporation normally covers up to $500,000 in losses. So this person would expect to be covered up to $500,000 in losses. But in fact they will only get their $100,000 back, which is what they put in. And if their final statement only read $800,000 because they took out $200,000 along the way, Picard is going to sue that person for $100,000.
That may seem harsh. But to me it’s fair. And it’s the only way to make sure that everyone gets an equal portion of what they put in back. Picard has said he will not go after anyone for whom giving back the money they already cashed out of Madoff would be an undue financial hardship. And he has already dropped numerous claims against former Madoff investors who wouldn’t be able to pay. But consider Picower. Even after paying $7.2 billion his family members are likely to have hundred of millions if not billions of dollars left. Shouldn’t his estate have to pay every penny back he took out of Madoff. That seems fair to me. And if you argue that others should get to hold onto their Madoff winnings above what they put in, you will have to argue to put billions back in Picower’s families hands as well, instead of paying back the investment of thousands of Madoff victims who invested in a feeder fund and have yet to see one dollar of their money returned. And I don’t see how you can.