Madoff Victims Battle Over Restitution Plan

Feb 4 2010 | 11:30am ET

Bernard Madoff has been shipped off to prison, unlikely to ever breathe free again. But the wrenching repercussions of his unprecedented $65 billion fraud are still being felt, most recently in a lower Manhattan courtroom.

Therein, the more fortunate victims of the massive Ponzi scheme are doing battle with the court-appointed receiver in the case—acting essentially as a proxy for the less-fortunate Madoff victims—over dividing what’s left of Madoff’s once-$17 billion empire. The trustee, Irving Picard, doesn’t think those victims who withdrew more from their Madoff accounts than they put in deserve any of the recovered assets. But at a hearing Thursday, attorneys for those Madoff clients said Picard was ignoring the law.

“The definition is the definition,” Daniel Glosband, one of the lawyers opposing Picard’s formula. “They can’t change it. And with all due respect, your honor, neither can you,” he told U.S. Bankruptcy Judge Burton Lifland.

According to the opponents of Picard’s plan, the law that created the Securities Investor Protection Corp. that Picard works for specifies that customer losses should reflect the final account statements, even if those statements are bogus. Those investors fighting the plan say every one of the 5,000 claimants against Madoff should get an advance of $500,000.

Another lawyer opposing Picard, Brian Neville, argued that “Congress’s intent was to protect a customer’s legitimate expectations, even if the broker stole the customer’s money and never bought securities.”

But Picard’s lawyer argued that “no one in their right mind” would use financial statements that are acknowledged by all to be a fiction—an argument met with mocking laughter by the gallery, The New York Times reports.

“What’s in the pot is the money of the people who didn’t take anything out,” David Sheehan said. Those who did “cannot have a legitimate expectation of sharing in the profits of a fraudster.” If Picard’s plan is thrown out in favor of the so-called net winners, the so-called net losers will receive much less than they would under the existing plan.

Lifland’s ruling is not expected before this summer. Both sides have pledged to appeal if he rules against them.

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