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Investors Compete for a Piece of the Madoff Pie

Eric Konigsberg|The New York Times
Monday, 29 Jun 2009 | 9:37 AM ET

Helen Davis Chaitman is a victim of Bernard L. Madoff’s multibillion-dollar Ponzi scheme. So is Burt Ross.

AP

That would seem to make them natural allies in their fight to recover their lost millions.

Instead, as Mr. Madoff prepares to be sentenced in Federal District Court in Manhattan on Monday, they are rivals warring over who should get how much from the government-chartered agency that insures customers of failed brokerage firms.

Some investors are angry that they could get less favorable treatment than others, depending on how they invested with Mr. Madoff — directly, or indirectly through so-called feeder funds — and how much they withdrew before the Ponzi scheme collapsed.

“It’s been your typical reality-show kind of fighting,” said Jen Meerow Berniker, 32, a second-generation Madoff customer whose retiree parents lost their life savings through a feeder fund. “It’s every man for himself right now.”

Indeed, while Monday’s sentencing of Mr. Madoff will satisfy the desire by victims that he be punished for stealing their money, it will take months or even years longer to resolve their claims.

Federal prosecutors are seeking a 150-year sentence, the maximum under federal guidelines. Ira Lee Sorkin, a lawyer for Mr. Madoff, 71, has argued for a 12-year term.

The central problem being played out among Madoff victims is that only a small fraction of the nearly $65 billion that disappeared has been recovered. While insurance will fill some of that gap, it is clear that many people will not come close to recouping their losses — meaning that whatever one group of investors get will affect how much is available for another group.

Ever mindful that the claims process is, in effect, competitive, some groups of investors are jockeying for favorable treatment from the Securities Investor Protection Corporation, the government-chartered insurance agency.

Decision Day for Madoff
Bernard Madoff will be sentenced Monday, and Michael Ramos, a former federal prosecutor; Jamie Wareham, global chairman of litigation at Paul Hastings; and the CNBC news team discuss the latest details.

Ms. Chaitman disapproves of the way Irving H. Picard, the court-appointed trustee overseeing the claims process, is calculating investor losses — on the basis of “net equity,” or simply the difference between the total amount invested in the fund and the total withdrawn before it collapsed.

Ms. Chaitman, who represents more than 100 others in a lawsuit against Mr. Picard, is adamant that they should be reimbursed for the total value of their accounts with Mr. Madoff, even if their withdrawals exceeded their deposits and even though the balances reflected on their statements were based on fake trades.

“Fictitious trades are exactly what SIPC was intended to protect against — a dishonest broker who steals the securities or a broker who never buys the securities,” Ms. Chaitman says, even though she says she never took money out of her Madoff account and therefore has a claim under Mr. Picard’s rules.

Her argument on behalf of those who did withdraw money before Mr. Madoff’s scheme was uncovered in December provokes outrage from Mr. Ross, a former mayor of Fort Lee, N.J., who says his Madoff losses totaled $5 million.

“In terms of morality, it’s not really fair,” he said. “For those of us who never took money out, these people who did are at an advantage, and now they want to get money again.”

For his part, Mr. Picard defended his methodology in an interview last month, saying that valuing cash losses on the basis of the fraudulent transactions would essentially “allow the thief to pick the winners and losers.”

The infighting among some investor groups has been building ahead of the July 2 deadline for filing compensation claims with SIPC.

The tension was palpable at a meeting of more than 150 Madoff victims on June 16 in Port Washington, N.Y. Richard Friedman, an accountant and Madoff victim who addressed the audience, joked that because SIPC has talked about “spreading around the pain,” he would be circulating a sign-up sheet for anybody interested in kicking Mr. Picard. The room, filled largely with senior citizens, laughed heartily.

A large majority of the people who invested money with Mr. Madoff did so through an intermediary agent like a feeder fund, making them ineligible for SIPC coverage. Mr. Picard has encouraged victims in this group to file claims nonetheless; their fate will probably be decided by the courts years from now.

Some of these indirect investors say they resent that the big investor groups are fighting over Mr. Picard’s definition of net equity without regard to those who have been excluded entirely from the claims process.

Ms. Berniker, whose retiree parents lost their life savings through a feeder fund, said: “When we first learned that the indirects weren’t covered, I had this feeling of being violated again. It’s sort of a question of, ‘How many times can this happen to me?’ ”

The indirect customers who have been outspoken say they are being treated as members of a lower caste, in that many of them went through feeder funds because they lacked the requisite $1 million or $2 million minimum to go straight to Mr. Madoff.

Initially, those who were invested in the largest feeder funds, like J. Ezra Merkin’s Gabriel Capital and the Fairfield Sentry fund, were thought to be better positioned to recover their losses, in that those firms, unlike Mr. Madoff, would at least have assets to sue for. But several of the feeder funds are themselves being sued by Mr. Picard and are not likely to emerge with their money intact.

What is more, those who invested their individual retirement accounts in Mr. Madoff’s fund through feeder funds have been unable to obtain a theft-loss deduction on their federal taxes. They have had similar difficulties qualifying for an adjustment in their Medicare premium, which is based on income figures they now know to have been falsely inflated.

To date, three complaints against SIPC have been filed by victims disputing Mr. Picard’s methodology.

But SIPC, which is financed by the brokerage industry, has only so much money to immediately hand out to Madoff victims. The agency’s maximum upfront compensation is $500,000 for each eligible customer.

While many will eventually receive reimbursement beyond the $500,000, when that will happen and at what fractional rate depends entirely on lawsuits Mr. Picard has filed seeking more than $10 billion from large investors who withdrew money before Mr. Madoff’s scheme collapsed.

The agency has so far recovered $1.25 billion, including recent settlements with two offshore hedge funds. But that exceeds only slightly the $972 million in loss reimbursements that SIPC had approved as of last week, from just 441 claims.

In all, about 8,800 claims have been filed, and even conservative estimates place the total number of Madoff victims in the tens of thousands.

Those daunting numbers have not stopped some investor groups from arguing for a larger share of Madoff claims. A few have invoked socioeconomic differences.

Sherry Morse, an active member of several Madoff victim groups whose husband’s family was among Mr. Madoff’s earliest investors, said she felt Mr. Picard’s interpretation of net equity amounted to a sort of fake-populist class baiting.

“People who took money out are being penalized for being normal,” she said. “But whether you have $10 or $100 million, it’s not a crime to make money in America. Somehow everybody came to think it’s nothing but rich people who are all getting what they deserved.”

Mr. Ross, the former Fort Lee mayor who did not withdraw money from his Madoff account before the Ponzi scheme was uncovered, said of Ms. Morse and her allies: “If they do get more money out of the trustee, it means he’s going to have to split the pie into pieces that much smaller for all of us.”

Mr. Ross, whose $5 million in losses were divided between a direct account with Madoff and a feeder fund, said he had stopped participating in online discussions about the Madoff scandal “because I need to give myself distance from the self-righteousness and the people who have anger.”

He said that he had received a $500,000 SIPC check, which he used to pay off his house.

“Without the SIPC check, keeping the house would have been more of an issue, so it’s easy for me to say this,” he said. “But I still don’t like that the groups wouldn’t discuss the indirects.”

Diana B. Henriques contributed reporting.

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