Securities Law Blog

Friday February 20, 2009 was an important date in the life of this case. That was the date of the First Meeting of Creditors in New York City in the Madoff bankruptcy. Many investors attended in person-and were able to ask some pointed questions of the Trustee Irving Picard, and his cadre of attorneys. While much information came out at the hearing, here are some of the most important developments to my eye:

1. Fraudster Madoff Made No Trades: Picard reported that there is no evidence in the 7000 plus documents that his staff (including scores of forensic accountants I am told) has reviewed that ANY securities were ever purchased for Madoff clients. This is significant because SIPC covers limited cash ($100,000) deposits in a securities account. In my mind, if there were never securities purchased, then all you are left with in a SIPC claim is the claim for your stolen cash balances. But that will develop with time—securities recovery is capped at $500,000, cash at $100,000--but that is not additive-the total amount is $500,000.

2. The Clawback is Coming: David Sheehan, one of Picard’s attorneys confirmed that Picard fully intends to clawback funds paid out to them in excess of amounts deposited. (He has 2 years to bring any clawback actions). However, according to the New York Times, the Trustee said that “it would not be practical to seek clawbacks of small amounts from customers of limited means”.

Bloomberg reported thusly:

"He said the trustee would seek to recover money that investors withdrew over the amount they put in. “We will be seeking to recover false profits from people who received them in substantial amounts over the years,” Sheehan said.

Picard said he would not pay out a SIPC claim if he has a potential clawback claim against the investor. Dozens of investors asked Picard questions about the possibility of clawbacks.

“These clawbacks are making criminals out of innocent people,” a woman from the audience said.

Sheehan later said clawbacks would be determined on a case- by-case basis, taking into account such factors as the size of the investment, the time period over which any money was invested, the investor’s relationship with Madoff or other insiders and a review of account statements".

I heard some statistics today on the clawback in the Bayou Capital case. About 135 clawback cases were filed. Of that number, investors in 95 fought the clawback. All but 30 of those settled for a lesser amount that was being sought in the clawback. If the 30 that fought the clawback, there were a few--less than 10--that actually prevailed. But there is no doubt that fighting the clawback is an uphill battle.

3. What is The Amount of my Tax Loss/Investment?: Like so many other things in this case—we have more questions than answers. The IRS won’t give guidance. The Trustee won’t give guidance. If you invested $200,000 years ago, and have a statement that showed you had $1 million in the account, what are your losses? I think that the Trustee will take the position that the loss is $200,000—given his comment above. Simply put, if you took out more than you put in-then Picard will NOT pay out a SIPC claim-and may come after you for the distribution. (See also the article in the Boston Globe on this on 2/21/09). This is especially true since there was no trading activity (at least for the past 13 years). Regardless of what the Madoff statements may have said—the reality was that the account was never worth more than the $200,000 that went in when the account was opened. I am not a tax lawyer-but I would strongly urge you to speak to one, or to your CPA.

The timing and size of tax losses will be a huge issue in this case. Are they theft losses-such as can be used to offset current ordinary income? Do you have the right to amend your returns to reverse capital gains taxes that you may have paid on non-existent "profits"? What, if any, impact does the filing of a SIPC claim form have on the tax situation? Many tax lawyers (of which I am not one) have been advocating filing for a theft loss deduction–in full—for the 2008 tax year. But that still doesn’t address the amount that you should seek in such an IRS filing. Again-speak to your CPA or tax counsel. Believe me-they won’t be able to answer the question either—but it is important to get them on notice that you have an IRS Madoff-related issue asap! The IRS will have to give guidance sooner or later. I do know that there have been other Ponzi cases where the losses have been treated as theft losses. See, Berado v. Comm’r T.C. Memo 1987-433; Jensen v. Comm’r T.C. Memo 1993-393

4. Madoff’s Helpers: It is clear to me that 7000 boxes of documents of non-existent trades means that Madoff had help—a lot of it. This is not a one man case of embezzlement from an account. This took a lot of effort. You should keep an eye on the website for Conde Nast Portfolio Magazine. The print version of the March Issue is out now and there is even more online content available. Portfolio has many folks on this story-and there is a good amount of information. I was interviewed for the stories-specifically about the rights and responsibilities of some of the Madoff staff. I expect that we will hear more from that shortly. That is significant to victims only if it provides them someone to sue-which is unlikley to yield much more funds for a potential recovery given the number of investors

5. No SIPC for Feeders: SIPC will cover only the direct investors with Madoff. Anyone who invested through a feeder fund will not recover from SIPC. The feeder fund will have the SIPC claim, not the investors in that fund. I was told today by sources close to Picard that he has "very good" records on the Madoff accounts and will be able to demonstrate "to the penny" all amounts flowing into and out of the accounts over the last 6 years.