Madoff Trustee May Do What Bernie Didn't: Give Victims Profit
Feb. 11 (Bloomberg) -- After Bernard Madoff was exposed as the biggest Ponzi schemer in U.S. history, Irving Picard was named to liquidate the con man's bankrupt firm and recover some of the $65 billion Madoff told customers was in their accounts. Two years later, Picard is about halfway to recovering the $20 billion customers invested before Madoff added phony profits.
As Picard pursues hundreds of lawsuits seeking $100 billion from banks and others he claims profited from the fraud, he may even be able to give some victims something Madoff never managed to deliver -- a legitimate return on their investment, Bloomberg Businessweek reports in its Feb. 14 issue.
His strategy is simple. "We're looking to collect as much money as possible," Picard said outside court Jan. 13, after a bankruptcy judge approved a $7.2 billion settlement Picard and U.S. prosecutors reached with the estate of Jeffry Picower, a Madoff investor who died in 2009.
The Picower settlement --- the biggest of its kind --- underscores the tricky position Picard is in: To return money to Madoff's victims, he has to first take it from somebody else. Picard's choices about whom to pay and whom to sue have led some victims to feel wronged again.
"He's doing what the receiver is supposed to be doing," says John V. Donnelly III, a partner with the law firm Cozen & O'Connor in Philadelphia, who represented an investor in recovering assets frozen in R. Allen Stanford's alleged $7 billion fraud.
Profiting From Fraud
Picard has made several decisions that paid off, including seeking additional funds from investors he claimed should have known they were profiting from a fraud, says Sandra Mayerson, a bankruptcy lawyer with the firm Squire Sanders in New York.
"He's consistently taken the most aggressive position possible," she says, "and that's been very successful in recovering money for the estate."
Just days after Madoff told authorities his financial empire was "one big lie" in December 2008, the Securities Investor Protection Corp. named Picard, 69, trustee of Bernard L. Madoff Investment Securities, making him responsible for unwinding the fraud. Madoff, 72, is serving a 150-year sentence in federal prison in North Carolina.
When Picard was named Madoff trustee, the SIPC said he had liquidated more brokerage firms as trustee than anyone. A week later he announced he was leaving his law firm, Newark, New Jersey-based Gibbons PC, for the New York office of Baker Hostetler LLP, a 650-lawyer firm based in Cleveland.
Soul Mate
At Baker Hostetler, he joined David Sheehan, 67, a friend and former law partner, who serves as his chief lawyer in the Madoff case. In December, Picard filed a $19.6 billion suit against Bank Medici and its founder, Sonja Kohn, whom Picard called Madoff's "criminal soul mate," along with Bank Austria AG and UniCredit SpA. Kohn, who hasn't been criminally charged, has said she was a victim of the fraud.
In complaints unsealed this month, Picard claimed Fred Wilpon and Saul Katz, owners of the New York Mets, and JPMorgan Chase & Co. had all the information they needed to discover Madoff was running a vast fraud and looked the other way instead of taking steps to expose him. The suits seek $6.4 billion from JPMorgan and as much as $1 billion from Wilpon and Katz.
JPMorgan wasn't aware of Madoff's fraud, said Jennifer Zuccarelli, a spokeswoman for the bank, in a statement. The activity in Madoff's account was consistent with a legitimate investment advisory business, she says.
'Strong-Arm Effort'
Wilpon and Katz said Picard's suit against them is "an outrageous strong-arm effort to try to force a settlement by threatening to ruin our reputations and businesses." They called the trustee's claims "abusive, unfair and untrue."
If Picard and Wilpon and Katz negotiate a settlement, they might model it on a deal made in connection with Bayou Group's Ponzi scheme, uncovered in 2005. In that instance, a partnership tied to Wilpon gave up $12.9 million, which represented all profits it made plus 44 percent of the principal, after a judge ruled that Bayou investors could be pursued if they had seen "red flags" that should have alerted them to the fraud.
The case against the Wilpon and Katz "will strike fear into the hearts of a lot of people, because if they should have known, then a lot of people should have known," Mayerson says.
Not all of Picard's targets are banks or wealthy investors. Helen Chaitman, a New York City lawyer who was a Madoff investor, says she represents many people of relatively modest means whom Picard sued in the weeks leading up to the Dec. 11 deadline for him to file claims. The date, which was the two- year anniversary of Madoff's arrest, was also the day his son, Mark Madoff, committed suicide by hanging himself in his Manhattan apartment.
Net Winners
Some individuals, known as "net winners," withdrew more from their Madoff accounts than they invested. Picard is suing hundreds of them to recover the fictitious profits he frequently refers to in legal papers as "other people's money."
Most of those people withdrew and spent the money with no idea they were living off the proceeds of a fraud, says Chaitman, and many "are frantic" and have no way to pay, she says. Even clients with approved claims, who are likely to receive money from Picard, have been forced to sell their claims to investors for 50 cents to 65 cents on the dollar because they need cash, she says.
Picard says he will use his discretion not to pursue claims against Madoff victims who can show that paying back their profits from the fraud would cause financial hardship, according to a December press conference and his official website. As of Feb. 4, Picard had allowed claims made by 2,401 former Madoff investors and denied more than 13,471, according to his website.
Fees
So far the bankruptcy court has approved $119 million in legal fees for Picard and Baker & Hostetler. The money is to be paid by the SIPC, Picard has said in court papers. Work on the Madoff case accounted for at least $58 million of the firm's estimated $386 million revenue in 2010, according to The American Lawyer.
Chaitman, who has frequently opposed Picard in the Madoff case, credits him with uncovering details of Madoff's fraud, including the identities of many alleged accomplices that haven't come out through criminal prosecutions or an investigation by the SEC. "Thank God for Picard," she says.
To contact the reporter on this story: Bob Van Voris in New York federal court at rvanvoris@bloomberg.net .
To contact the editor responsible for this story: David E. Rovella at drvoella@bloomberg.net .
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