Bernie Madoff, Crime, Department of Justice, White-Collar Crime

A $7.2 Billion Settlement Generates Money for Madoff Victims

Irving Picard

Rack up another win for trustee Irving Picard, the partner at Baker Hostetler who’s cleaning up the Bernard Madoff mess. On Friday, Picard and Preet Bharara, the headline-making U.S. attorney for the Southern District of New York, announced a $7.2 billion settlement with the estate of Jeffry Picower (no it’s not spelled “Jeffrey”).

Picower, a successful investor and prominent philanthropist, earned billions — both real, through investing with Goldman Sachs, and fictional, through investing with Madoff — before he died in October 2009. Picower was found dead in the swimming pool of his home in Palm Beach, apparently after suffering a heart attack (a plot device familiar to viewers of Brothers & Sisters and The OC). If he had held on until January 2010, Picower would have avoided the estate tax.

Of the $7.2 billion settlement, $5 billion will go to Picard, to settle the complaint he filed against Picower in bankruptcy court, and $2.2 billion will go to the Department of Justice — the largest civil forfeiture payment in U.S. history. All of this money will eventually find its way to qualifying Madoff victims.

Based on monies collected to date, what kind of recovery might Madoff’s victims be looking at?

A pretty decent one — or at least much better than the big goose egg some feared when the Ponzi scheme was first discovered. According to the New York Times:

The settlement provides relief only to those Madoff investors who withdrew less from their accounts over the years than they originally invested. [The] “net winners,” investors who took out more cash than they put in, will not be eligible to share in the recovery unless a federal appeals court determines that their claims are valid. A ruling on that issue is expected next year.

But the Picower payment will almost certainly affect the growing speculative market for Madoff claims, where professional investors have been quietly buying up claims approved by the trustee at a substantial discount to their face value. In recent months, traders have offered Madoff victims 20 to 34.5 cents on the dollar for their claims.

Now, it seems increasingly likely that claims bought for that amount will wind up being worth considerably more, perhaps as much as 50 cents on the dollar — a nice profit for the speculators who took the risk of buying them.

The Madoff Ponzi scheme has often been referred to as a $50 billion or $60 billion fraud, but that’s not really accurate, since many of these “billions” were illusory profits. Cash losses from the Madoff fraud, the better measure of the fraud’s size, have been estimated at around $20 billion — and now that about $10 billion has been collected, counting the Picower money, 50 cents on the dollar is starting to look like the floor in terms of the recovery rate.

And hey, there can even be a bright side to being ripped off by Bernie Madoff. Check out this recent, interesting Times op-ed by writer Michael Kubin, a Madoff victim who concludes by expressing his gratitude to the man who defrauded him.

P.S. Apologies for this late coverage. We meant to write about the settlement on Friday — word started to leak out as early as Friday morning, even though the official announcement didn’t come until later in the day — but bonus coverage distracted us.

Deal Recovers $7.2 Billion for Madoff Fraud Victims [New York Times]
Picower, Madoff Estate Reach $7.2 Billion Settlement [WSJ Law Blog]
Record-Setting Madoff Settlement Announced With Picower Estate [Am Law Daily]
The Ponzi Scheme That Changed My Life [New York Times]

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