Madoff Feeder Fund Settlement Falls Apart

Nov 22 2013 | 11:07am ET

A proposed $800 million deal between a major Bernard Madoff feeder fund and the court-appointed receiver in the case has collapsed.

The settlement between Kingate Management and Irving Picard foundered following the Justice Department's announcement that indirect Madoff investors—but not his feeder funds—would have access to a $2.35 billion fund that is not overseen by Picard. Picard's office was taken by surprise by the announcement, The Wall Street Journal reports.

Picard had reportedly assumed that the Madoff Victim Fund—overseen by former Securities and Exchange Commission Chairman Richard Breeden—would employ the same reimbursement methodology that he does, with only direct investors, including feeder funds, eligible for payouts. Instead, investors in funds like Kingate will have access to the money directly, rather than through Kingate, which had $1.73 billion invested with Madoff.

Kingate planned to sell its claims against the Madoff estate to Deutsche Bank after finalizing its settlement with Picard. Deutsche Bank, in turn, was in talks with hedge funds including Centerbridge Partners, Farallon Capital and Solus Alternative Asset Management, to resell those claims, according to the Journal.

But the value of such secondary claims immediately dropped in the wake of Breeden's move, putting the Kingate trades on hold.

"The forfeiture programs are not set up for hedge funds to have another asset class to trade," Breeden said dismissively. "They're set up to allow victims of a crime to recover a portion of their losses."

"I think the republic will survive [the Kingate settlement] having to restructure itself."

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