Court Backs Madoff Trustee’s Restitution Plan

Aug 17 2011 | 12:55am ET

The receiver in the Bernard Madoff case has won a crucial court ruling over his plans to distribute the assets he recovers from the scam.

The U.S. Second Circuit Court of Appeals in Manhattan upheld a federal bankruptcy court judge’s approval of Picard’s methodology for determining who is entitled to receive restitution from the bankruptcy estate. Under Picard’s plan, Madoff investors who withdrew more than they invested over the life of their relationship with Madoff are not entitled to get anything; indeed, Picard has sued many of them to recover the phony profits they withdrew from the $65 billion Ponzi scheme.

The ruling is a victory for the so-called “net losers,” those Madoff investors that withdrew less than they invested, and could expedite the distribution of the $8.6 billion Picard has recovered since Madoff’s fraud collapsed in 2008.

The so-called “net winners,” among them the owners of the New York Mets, had argued that Picard was obligated to use Madoff’s bogus final account statements to determine payouts to victims, rather than principal invested. But the Second Circuit ruled that such a system would be “impermissible.”

“Mr. Picard’s selection of the net investment method was more consistent with the statutory definition of ‘net equity’ than any other method advocated by the parties or perceived by this court,” Chief Judge Dennis Jacobs wrote.

“Use of the last statement method in this case would have the absurd effect of treating fictitious and arbitrarily assigned paper profits as real and would give legal effect to Madoff’s machinations.”

Lawyers for the net winners promised an appeal to the U.S. Supreme Court.

“The Second Circuit’s ruling will destroy investor confidence in the capital markets because the promise of [Securities Investor Protection Corp.] insurance is illusory,” Helen Chaitman, one of those lawyers, said. “The message to every American who invests in the stock market is clear: Invest at your own risk and assume that SIPC insurance does not exist.”


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