Bloomberg News

High Court Shouldn’t Hear Madoff Investor Appeal, SEC Say

May 25, 2012

Bernard Madoff’s investors shouldn’t be allowed to appeal a court ruling denying them payment for fake Ponzi profits on their account statements, the U.S. Securities and Exchange Commission said.

The investors asked the U.S. Supreme Court to hear their case after a federal appeals court in New York said in August it would be “absurd” to treat fictitious paper profits as real, upholding a lower court ruling. The Supreme Court justices asked the SEC to file papers by today if they should take the appeal on whether the liquidator of the con man’s brokerage is using the right formula to compensate investors.

The issue of how Madoff Ponzi investors should be compensated is “extraordinary,” and doesn’t justify attention from the nation’s top court, the SEC said. In the past 18 years, only seven Ponzi schemes have been liquidated, it said.

“Petitioners thus do not present an issue of recurring significance warranting this court’s review,” the SEC said in the filing, made on its behalf today by the U.S. Solicitor General, who supervises government cases before the high court.

If the justices decline to hear the case after conferring on the SEC brief, Madoff trustee Irving Picard could begin to tap into the $9 billion he says he has raised for Ponzi victims, starting with some of the $2.3 billion already set aside for customers. He could share the money among investors who lost around $17 billion in principal, instead of a wider circle owed $57 billion, including profits, according to his latest calculations.

Picard’s Formula

Picard’s formula for compensating victims is to figure their net losses -- money they put in, minus money they took out of Madoff’s defunct brokerage. He allots the net losers a share of the available money. Investors with net gains, who took out more money than they put in, have to wait until net losers get paid in full.

The investors appealing said customers’ last account statement from the brokerage should be the measure of what they’ve lost. The choice between the two methods “turns on the details of a particular fraudulent scheme,” with little application for the majority of investors, the SEC said.

“Purported increases in the value of customers’ accounts, moreover, were entirely fictitious,” validating the lower court rulings, it said.

Asked if he was disappointed, Lawrence Velvel, one of the appellants, said he expected the SEC to oppose the appeal. Many of its arguments were similar to Picard’s, he said.

$330 Million Paid

More than three years after Madoff’s epic swindle collapsed, Picard has paid investors about $330 million, because most of the $9 billion his website says he has raised -- largely from settlements with former Madoff investors or their estates, such as Jeffry Picower’s -- is tied up in court challenges. The appeal over his formula is partly tying up $2.3 billion in customer accounts, while another $6.5 billion won in settlements is separately being challenged in courts.

Reflecting poor payment prospects, larger claims on the Madoff brokerage’s estate have fallen from about 70 cents on the dollar last year, to about 58 to 62 cents, said Joseph Sarachek, managing director of claims trading at CRT Capital Group LLC, which buys and sells distressed debt.

Picard and his law firm have charged $273 million for their Madoff work so far. Madoff is in jail, serving a 150-year sentence for fraud.

The brokerage liquidation 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). One of the investors’ appeals on Picard’s formula is Velvel v. Picard, 11-00986, U.S. Supreme Court (Washington).

To contact the reporter on this story: Linda Sandler in New York at lsandler@bloomberg.net

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net


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