Will Madoff’s Investors Break Even?

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Madoff offers a ponzi pointer (Photo: Shannon Stapleton/REUTERS)

Bernie Madoff investors might end up getting more of their money back then they thought.

Two years after the now-convicted-and-jailed Ponzi schemer’s arrest, the prospects for his beleaguered victims are all of a sudden looking up. In the past few weeks, Irving Picard, the bankruptcy trustee in the financial fraud case has issued a flurry of lawsuits and settlements. The trustee netted $500 million on Monday alone in a settlement with Swiss bank Union Bancaire Privee. Picard’s moves are raising the possibility that Madoff investors could get all of their money back and then some. In fact, if Picard is successful in all of his cases, investors in the what has been called the largest financial fraud in history could walk away with a 65% profit. That is in large part due to the efforts of Picard and his team of lawyers, and the peculiarities of the fraud. Here’s why:

In the weeks following the arrest, experts said that fraud’s victims were likely to end up losing nearly everything they sunk into Madoff’s funds. An Associated Press article from early January 2009, said Bernie’s victims would be lucky to get back even 10% of their money. Every dollar invested would come back worth pennies. Many victims hocked jewelery and other valuables. Some sold houses. A few committed suicide.

Nearly two years later, though, it looks those who put their money in the worldwide ponzi scheme will turn out far better than many predicted. Picard has recently rolled out a number of large cases against banks, which he believes enabled Madoff and should have suspected fraud. (After two years, it becomes harder to bring some of these suits.) Among the recent cases are suits against British bank HSBC for $9 billion, and JP Morgan Chase for $6.4 billion. The recent cases are on top of the $15.5 billion in legal claims Picard already has filed. The trustee has also recovered nearly $2 billion, including Monday’s settlement. All told, Picard could collect nearly $35 billion for Madoff investors.

That number, surprisingly, is considerably larger than what is now believed to have been invested in Madoff’s phony funds. Picard has approved 15,491 investors’ claims for $5.8 billion. There are another 900 claims from investors or funds of investors who say they or their clients lost money. Stephen Harbeck, who is president of the Securities Investor Protection Corporation,which is officially in charge of pursuing Madoff’s estate for investor losses, says many of those remaining claims include the larger feeder funds and could be billions each. Even so, Picard’s findings point to the total investment losses in the Madoff fraud, when you net out the fictitious gains,  to be just under $20 billion.

Kevin McCue, who is on Picard’s team at law firm Baker Hostetler, says whatever the trustee is able to recover will be distributed to investors based on the size of their claims. Once investors are paid back their investment in full, the trustee will settle the $1.7 billion that the Madoff’f securities firm, which went bankrupt when the fraud was discovered, owes to other non-investor creditors, including paying back SIPC for the nearly $250 million in fees that it has shelled out to retain Picard’s firm and other professionals trying to recover money for investors.  But even after those claims are paid there could be an additional $13 billion left in Picard’s purse. It is likely that money would be distributed to Madoff investors as profit.

Madoff, it appears, never turned a profit on the money he was given or even invested it. So how is it possible that his “investors” could end up with a gain? The reason is that Picard is suing the banks for above and beyond what they got in fees for working with Madoff. Picard says the banks should have to pay damages for their support of Bernie. It appears the best asset Madoff investors ever had was the fraud itself. At the end of the day, the Madoff’s graft was surprisingly basic. He made up fake statements and shifted money among investors. Picard says it was simple enough and went on for so long that many of the banks should have known. Indeed, Picard claims HSBC’s own auditors told management that Madoff’s purported investment gains were suspicious. Another bonus is that Madoff was a relatively frugal ponzier. Unlike others fraudsters he didn’t blow the majority of this funds. He distributed it to other investors.

Harbeck stresses that there is a lot that would have to go right for investors to get all of their money back. He says full recovery is still an unlikely outcome. And he says that it is silly to even think that Picard might turn up enough money for investors to turn a profit.  “There is a big difference between filing a suit, winning a suit and being able to collect on that suit,” says Harbeck. The banks don’t want to be found responsible for any part of the Madoff fraud. So they are unlikely to settle, especially if that means paying out large funds that make them look like they are admitting guilt. That could open them up to other legal claims. Indeed, both HSBC and JP Morgan say they did nothing wrong and that they will fight Picard’s suits, which both banks claim are baseless. Some of the feeder funds if they are found guilty for the full amount Picard has sued for might not be able to pay.

Nonetheless, the December 11th, two-year anniversary of the Madoff fraud is likely to be greeted with more hope than anyone ever expected. Madoff investors might not get all of their money back, but they are likely to get far more than the pennies that was once predicted.