Supreme Court: No inflation gains for Madoff victims

A Supreme Court decision on Monday could free up an additional $1.25 billion to be returned to victims of the epic Bernard Madoff Ponzi scheme. But it is bad news for the victims who brought the case claiming individual payouts should be adjusted higher for inflation. The high court let stand a lower court ruling rejecting that argument.

The decision is a major victory for court-appointed trustee Irving Picard, who has already recovered nearly $11 billion of the $17.5 billion in principal lost in the fraud. Picard has returned $7.25 billion to victims, but a U.S. bankruptcy court required him to hold most of the remaining money in reserve while the appeals played out.

This was the last major appeal pending, according to Picard's spokeswoman, Amanda Remus, who says the trustee will now go back to court to get more of the funds released.

Bernard Madoff in 2009
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There was no immediate comment from the plaintiffs.

Picard "will immediately request a new hearing date for approval of the Customer Fund Allocation and Distribution Motion originally filed on April 15 with the United States Bankruptcy Court for the Southern District of New York," Remus said in a statement.

That motion asked that about $1.25 billion be released from the reserve requirement and eventually returned to victims. It would leave only about $200 million in reserve to cover remaining appeals.

Bernard Madoff leaves U.S. Federal Court after a hearing regarding his bail on Jan. 14, 2009, in New York.
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The recoveries and payouts are more than just about anyone thought possible when Madoff's fraud first came to light in December 2008.

Flooded with redemption requests at the height of the financial crisis, Madoff confessed his wildly successful investment advisory business was in fact a massive Ponzi scheme. Investors had been told their accounts had grown to some $65 billion, but in fact Madoff had been fabricating trades for years.

Picard, whose fees are paid Wall Street firms through the Securities Investor Protection Corporation (SIPC), announced early on that victims would be entitled only to their "net equity" — the amount they had deposited with Madoff minus any money they had withdrawn.

That set off a frenzy in court, as investors tried to recover at least some of the gains they thought they had made.

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In addition to challenging the net equity formula itself, some victims demanded interest on their money. But courts rejected virtually all the appeals, including the demand that payouts at least be adjusted for inflation. A federal appeals court in February upheld the bankruptcy court's rejection of that claim. The Supreme Court's decision not to hear the case — announced without explanation — means the ruling stands.

Many of Madoff's victims — including all of those whose accounts were worth $925,000 or less — have already been made whole at least as far as their principal is concerned, thanks to Picard's recoveries and funds advanced by SIPC.

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Madoff himself, serving a 150-year sentence at a federal prison in North Carolina, has previously claimed he helped the process, including pressuring the widow of one of his largest investors, Jeffry Picower, to return $7.2 billion in the largest single settlement in the case.

But Picard has said there is no evidence the disgraced financier has played any role in the recoveries, and attorneys for Picower's widow have denied Madoff's story.

Meanwhile, a separate $4 billion fund made up of criminal forfeitures in the case is aimed at those who invested with Madoff indirectly through feeder funds. A court-appointed special master of that fund, former SEC Chairman Richard Breeden, is still sorting through tens of thousands of claims.