Customers defrauded by Bernard Madoff's Ponzi scheme deserve repayment of as much as $500,000 each, even if they took out more than they put into his investment business, a lawyer argued today to an appeals court.
Customers defrauded by Bernard Madoff’s Ponzi scheme deserve repayment of as much as $500,000 each, even if they took out more than they put into his investment business, a lawyer argued today to an appeals court.
U.S. Bankruptcy Judge Burton Lifland erred when he ruled in March that the Securities Investor Protection Corp. doesn’t offer insurance to investors, and that Madoff customers can only collect from SIPC if they put in more cash than they took out from his business, attorney Helen Chaitman argued in a brief.
Chaitman, who represents 700 investors, asked the U.S. Court of Appeals in New York to reverse Lifland and rule that SIPC trustee Irving Picard should review claims based on final account statements in December 2008 that included fake profit from the fraud. Those investors say they had no knowledge of the fraud at New York-based Bernard L. Madoff Investment Securities LLC.
“Appellants are, typically, people in their 70s, 80s or 90s, whose assets, other than their homes, were invested in BLMIS” and face “serious medical issues,” Chaitman wrote in today’s filing. “They live in constant fear that the trustee will sue them for the amount they withdrew from BLMIS in excess of their investments.”
Those investors are among more than 2,500 Madoff customers who couldn’t collect any SIPC money under Lifland’s ruling, which Picard sought. Picard, who is overseeing the liquidation of Madoff’s business, has allowed more than 2,100 claims to proceed.
Stock Trades
Madoff, 72, who pleaded guilty last year, is serving a 150- year sentence for running the largest Ponzi scheme in U.S. history. Prosecutors said that Madoff falsely told investors that they profited from stock trades that never took place.
Picard, hired by SIPC to repay victims of the fraud, has said that using account statements to set claims would let Madoff decide who gets what, and include profit from trades that didn’t really happen.
Parties arguing against Picard’s valuation method included Sterling Equities Inc., owner of the New York Mets baseball team, the firm’s chief executive officer, Jeff Wilpon, and Mets LP.
Picard reported that Mets LP invested $522.7 million in two accounts with Madoff and withdrew $570.5 million in an unspecified period.
Sterling Investors
The Sterling investors filed claims with Picard for the amount their holdings would have been worth based on the last account statements sent by Madoff, which were dated Nov. 30, 2008, according to their brief filed today. Picard rejected the claims, on the ground that the Sterling entities had withdrawn more money than they gave Madoff.
In her brief, Chaitman said that none of her clients “had any suspicion of BLMIS’ criminality.” She said that before the Madoff case, SIPC “has never taken the position that it insures only the net investment where a customer’s statement showed the ownership of real (as opposed to non-existent) securities.”
Victims wanted their final account statements from Madoff’s firm to determine the size of their claims. They had argued to Lifland that SIPC was required to base claims on customers’ legitimate expectations. Lifland disagreed, ruling the account statements were “entirely fictitious.”
“The only verifiable amounts that are manifest from the books and records are the cash deposits and withdrawals,” Lifland said. Customers’ legitimate expectations aren’t relevant if they apply to “absurd results,” he said.
The U.S. Securities and Exchange Commission in December told Lifland it generally supported Picard’s “cash-in, cash- out” method. The commission said it would be more fair to victims if Picard adjusted the claims for inflation.
The case is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC, 08-01789, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
