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The Madoff Exiles


"I'm an investment adviser. There's no way Madoff should have been able to get away with a Ponzi scheme through even the most basic SEC investigation."
Ron Stein  

In the Madoff matter, however, SIPC has enraged many victims by adopting what they see as a draconian policy on who can be compensated and how much. The amount one was entitled to had typically been based on the investor’s “net equity,” or what was printed on his last statement before a crime was revealed. An investor with a balance of $20 million was said to have a net equity of $20 million and was therefore entitled to the maximum $500,000 payout. But the trustee of the Madoff bankruptcy, a lawyer named Irving Picard, is using another way of calculating net equity. Now, Picard said, net equity would comprise only the money an investor had actually deposited into his Madoff accounts, not including any appreciation in value. What’s more, any funds withdrawn from the accounts over the years would be excluded. If the investor with the $20 million statement originally gave Madoff $1 million (and nothing thereafter), but over the years had withdrawn $800,000, his net equity would now be defined as $200,000. That would be the amount SIPC would reimburse.

To base net equity on the number printed on one’s last statement, Picard said, was to base it on a lie. “In a Ponzi scheme,” he has said, “fictitious profits cannot be part of an equitable plan for distribution to customers.” Because the numbers appearing on the statements were simply made up by Madoff, using those statements to calculate restitution, he said, would be the same as to “allow the thief to pick the winners and losers.”

Many Madoff victims, however, say Picard’s definition runs contrary to the statute that created SIPC, and that his decision is purely about expediency. Since Picard has only recovered a little more than $1 billion of Madoff money, they argue, Picard needs to find ways to justify smaller payouts. “These companies paid for the privilege of using the SIPC label on their statements,” says one Madoff investor. “It’s about the securities industry not living up to what’s expected of them.”

Maureen Ebel applied for emergency funds from SIPC under a hardship program designed for dire cases. Her claim was approved, but she was asked to sign away her right to disagree with Picard’s definition of net equity. Picard eventually withdrew that condition. But Ebel says a second letter came announcing that because she had withdrawn $102,000 from her Madoff account within 90 days of the filing, SIPC didn’t have to pay her the full $500,000, just $398,000. Ebel filed a lawsuit against Picard, one of two challenging the definition of net equity. Picard eventually granted her the full $500,000, and a judge dismissed her case. Now she’s appealing, seeking damages for the delayed payment, and trying to head off the possibility that Picard may ask for some of the money back. There is talk that investors who earned money with Madoff and then withdrew some of it may actually be subject to “clawbacks” and forced to repay it. “Those customers who withdrew more than they put in and withdrew fictitious profits, even unknowingly, actually received someone else’s money,” Picard has argued. Ebel is keeping up the fight, she says, “for all the elderly people like my uncle. He’s 80 years old. He lived on his Madoff money. He took more money out than he put in, but according to Picard he’s entitled to nothing. It’s not right.”

As discouraging as SIPC has proved to be, it’s barely even an option for the thousands of people who invested with Madoff through a feeder fund. These indirect investors, as they’re called, are not considered by SIPC to be entitled to reimbursement at all. Under the letter of the law, they’re not Madoff investors; they’re investors in whatever fund they signed up with. An investor who put $1 million into, say, Fairfield Greenwich Group, only to lose it all, could sue Fairfield Greenwich for restitution, but that process could take years and the outcome is far from clear. Picard, meanwhile, has already sued three of Fairfield Greenwich’s funds, in his role as Madoff trustee, arguing that the funds were aware of the scam, or should have been, and must reimburse SIPC. If Picard is successful, any money he gets from the feeder funds will not go back to indirect investors but into the SIPC general fund, which would reimburse the direct investors first. Picard has advised indirect investors to submit an SIPC claim and let the courts decide if it is valid. But that process could also take years. Victims say the distinction between direct and indirect investors is bogus. “If you went to the bank and gave your money to the teller,” one indirect investor says, “didn’t you give the money to the bank?”

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