For Madoff victims, something is better than nothing

The 11,000 or so investors in feeder funds used by Ponzi schemer Bernard L. Madoff to commit the biggest fraud in history finally have a chance to get some of their money back. A $2.35 billion fund will distribute monies collected from various legal proceedings to an expanded pool of victims. 

Given that the total amount of money lost in the fraud is about $17 billion, there isn't nearly enough money to go around. Still, the fund is likely many victim's best shot at recouping some of their losses.

The Madoff Victims Fund has received "hundreds of inquiries" from affected investors or their representatives in the weeks since the U.S. Department of Justice determined that feeder fund participants are eligible for payments, according to Richard Breeden, the former Securities and Exchange Commission head who is the fund's special master. The deadline for applications to be submitted is February 28.  

In the years since Madoff's fraud was uncovered in 2008, only about 1,500 investors have received full compensation for their losses through the bankruptcy proceedings. 

Earlier this year, the 2nd U.S. Circuit Court of Appeals in New York ruled that feeder fund investors were not entitled to money from the bankruptcy estate that was distributed to other Madoff victims because they were not technically customers of Bernard L. Madoff Securities L.L.C. The decision was based on a reading of the Securities Investor Protection Act (SIPA). Many of these investors also have pending litigation seeking to recoup their wiped-out investments, which is a long shot that may take years to reach a conclusion.

Attorney William L. Chapman, who represents 14 feeder fund investors who lost the February ruling, said his clients are grateful that they are going to receive some sort of compensation for the hardships they endured because of Madoff's fraud. "It appears as though they are going to get something back," he said. "How much I don't know."

For his part, Breeden said it was impossible to know how much money each victim would receive until all the claims were received.

Those who were considered "net winners"  -- who withdrew more money than they put in -- aren't eligible for payments from the fund or anyplace else, which is a sore point for Ron Stein, president of Network for Investor Action & Protection, an advocacy group.

"What’s unfortunate and terribly unfair here is that Mr. Breeden, although he insists he isn't using bankruptcy law as his premise, is choosing to use Picard’s cash-in minus cash-out methodology, denying protections to smaller investors -- direct and indirect -- who relied on their savings," he said. "Tens of thousands of investors worldwide have been affected by this."

In response, Breeden argues that while he is sympathetic to the "winners" plight,  the laws regarding Ponzi schemes are pretty clear on this point -- they don't get to count lost profits.  He added that there isn't enough funds available to compensate these people for the hardships they endured.

"It's not to say that the net winners weren't harmed emotionally," Breeden said in an interview. "We feel very sorry for these people. (But) what they lost was an expectation."

The Madoff Victims Fund includes $2.2 billion collected from a historic civil forfeiture action from the estate of deceased Madoff investor Jeffrey Picower,  a civil forfeiture action against investor Carl Shapiro and his family along with actions against Bernard Madoff, his brother Peter B. Madoff and their co-conspirators. 

Bernard Madoff is serving a 150-year prison sentence in federal prison.  He has always insisted he acted alone.  Five former Madoff employees are currently on trial in New York for their roles in the Ponzi scheme.