Meet The Madoff Victims That Profited From Their Investment
It could be likened to the legal version of winning the lottery – a group of investors in Bernard Madoff’s $65 billion Ponzi scheme, once on the brink of having their $141 million claim denied and instead facing a $28 million clawback lawsuit, now stand to not only recover their initial investment but to legally realize a sizeable profit from the largest Ponzi scheme in history. But such a remarkable outcome- indeed, the first in memory – was not typical, and is due in large part to a clever legal strategy featuring multiple parties, multiple lawsuits, and, of course, deep pockets.
(Photo credit: Wikipedia)
The tale starts with two Madoff “feeder funds”, Beacon Associates (“Beacon”) and Andover Associates (“Andover”) (collectively, the “Funds”). The Funds were managed by Ivy Asset Management (“Ivy”), itself a subsidiary of financial behemoth BNY Mellon. Ivy’s connections to Madoff’s brokerage firm, Bernard L. Madoff Investment Securities (“BLMIS”) dated back to the the late-1980′s, and the Funds began investing with BLMIS in the mid-1990′s . The Funds would invest nearly $170 million – 71% of client assets – over the life of their relationship with Madoff, while withdrawing only $25 million. When Madoff’s fraud collapsed in December 2008, the Funds’ investors suffered collective losses of over $140 million.
The bad news did not stop there. When investors attempted to file a claim for a portion of recoveries in the BLMIS bankruptcy estate, court-appointed trustee Irving Picard informed them that only the Funds – and not its investors – met the legal definition of a party entitled to share in recoveries. And, to add insult to injury, Picard denied the Funds’ $141 million claim and instead filed a ‘clawback’ lawsuit seeking the return of over $28 million in distributions made to the Funds over the six-year period preceding the BLMIS bankruptcy filing. Investors hoping to recover at least a portion of their losses through the claims process saw those hopes dashed.
However, the adoption of a shrewd multi-faceted legal strategy now “virtually guarantees” that these investors will achieve what was previously unthinkable – realizing a legal profit from investing in a Ponzi scheme. And, no less, the largest Ponzi scheme in history.
The investors retained the law firm of Herrick, Feinstein LLP (“Herrick”) which, through lead attorney Arthur Jakoby, recognized that the Funds’ investors had viable claims against Ivy and the Funds, which was under investigation by the New York Attorney General (“NYAG”) for withholding damaging information about Madoff and failing to conduct adequate due diligence on its Madoff investments. The NYAG later filed a class action lawsuit accusing Ivy and the Funds of fraud and breach of fiduciary duties (the “Class Action”). The Funds’ investors soon joined the Class Action.
Meanwhile, Herrick continued to battle with Picard over the $28 million clawback lawsuit. After court-approved mediation proceedings began in February 2012, the parties ultimately settled the lawsuit nine months later. Under terms of the settlement, the Funds recognized Picard’s clawback claim, and agreed to pay $24 million to the BLMIS estate to be added to the pot of funds collected for Madoff victims. In return, Picard agreed not only to recognize the Funds’ claim for $141 million in losses, but to add the $24 million settlement payment to the allowed losses, resulting in a total claim of approximately $165 million. Most importantly, the settlement agreement contained the following language:
In contemplation of the potential settlement in the District Court Actions, the Trustee agrees that (i) he will not object to the Beacon/Andover Fund Defendants receiving funds from any of the other Settling Defendants or from certain other persons as recovery for losses due to Madoff, and (ii) any such payment will not affect the allowed claims of Beacon I and Andover Associates.
The District Court Actions referred to several consolidated lawsuits against Ivy and the Funds – one of which was the Class Action. The concession was crucial, for it freed the Funds’ investors from any future scrutiny or intervention by Picard based on the amount of any recovery in the Class Action. Indeed, soon after the settlement with Picard was finalized, Herrick negotiated a settlement in the Class Action that would net the Funds’ investors $99 million after legal fees and costs. Moreover, as part of the settlement, Ivy agreed to contribute $2 million toward the $24 million settlement with Picard.
Considered separately, the two settlements each represented positive outcomes for the Funds’ investors. However, considered together, and coupled with the expectation that Picard’s recovery efforts would likely result in total recoveries to victims of 65% to 80% of principal losses, these investors will have successfully (and legally) profited from investing in a Ponzi scheme. Based on the investors’ $165 million claim, total distributions from the BLMIS estate could range from $107 million to $140 million. Factoring in the $99 million brings the total range of recoveries from $206 million to $239 million. Thus, an “investment” of $165 million (including the clawback claim) will net a positive return of at least 25% – with upside to a possible 45% recovery. And, should Picard exceed the estimated 65% – 80% recovery, investors will profit even further.
The key to the investors’ success? Resolving the clawback claim and securing the release of any third-parties from whom the investors could turn to for compensation. Indeed, Picard took a strikingly different position in a recent proposed settlement between the NYAG and investors in the hedge fund of famed money manager J. Ezra Merkin. Seeking to block a proposed $410 million settlement, Picard claimed that the settlement encroached on his exclusive authority to recover assets for the benefit of Madoff’s victims. The crucial difference? Little, if any, funds would remain to satisfy Picard’s pending $500 million claim against Merkin and his hedge fund. Picard’s lawsuit remains pending.
Picard has recovered over $9 billion in his role as trustee. To date, he has made two distributions to victims representing just under 40% of their allowed losses.