FREQUENTLY ASKED QUESTIONS ABOUT THE LIQUIDATION OF BERNARD L. MADOFF INVESTMENT SECURITIES ("BLMIS")

BLMIS: WHAT HAPPENED AND WHERE ARE WE TODAY?

What happened to the BLMIS customers’ original deposits of principal?

Bernard L. Madoff Investment Securities LLC (BLMIS) was a Ponzi scheme. Cash was taken from “investors” in the fraud to provide “returns” and payouts to other customers. The sad truth is that any money withdrawn from the scheme was simply money that had been misappropriated (stolen) from other customers.

For a detailed FAQ on Ponzi Schemes, see also http://www.sec.gov/answers/ponzi.htm.

What happened to all the assets of the Madoff family that were seized? Shouldn’t that be distributed to BLMIS customers with allowed claims?

Determination of claims and distribution of funds from the Madoff Victim Fund (MVF) will be done under the supervision of Richard C. Breeden, who was appointed Special Master of the MVF by the Department of Justice. The MVF consists of approximately $4 billion gathered to date through various criminal and civil forfeiture actions brought by the United States Attorney's Office for the Southern District of New York.

For further information regarding the Madoff Victim Fund, Special Master Richard C. Breeden, and forfeitures to the U.S. Department of Justice in the Madoff Ponzi scheme criminal cases, please visit www.madoffvictimfund.com or contact:

Madoff Victim Fund
P.O. Box 6310
Syracuse, New York 13217
(866) 624-3670
info@madoffvictimfund.com

The Special Master's Customer Service Team can be reached Monday through Friday from 8:30 am to 5:00 pm EST.

Will the SIPA Trustee be able to get all of the stolen money back?

As of November 20, 2014, the Securities Investor Protection Act (SIPA) Trustee has recovered or entered into agreements to recover approximately $10.493 billion, representing more than 59 percent of the estimated $17.5 billion in principal lost in the Ponzi scheme by Bernard L. Madoff Investment Securities LLC (BLMIS) customers who filed claims. This recovery far exceeds any prior restitution effort related to Ponzi schemes both in terms of dollar value and percentage of stolen funds recovered.

The mission of the SIPA Trustee in the BLMIS liquidation is to oversee the liquidation as directed by the law, to recover assets stolen in the fraud and to assemble the largest Customer Fund and General Estate possible so that all BLMIS customers and creditors, as designated by the SIPA statute and U.S. Bankruptcy code, can ultimately receive some compensation for their losses as a result of this unprecedented Ponzi scheme.

What is the difference between the Customer Fund and the General Estate?

Mr. Picard is not only the SIPA Trustee for BLMIS customers with allowed net equity claims. He is also the SIPA Trustee for all BLMIS customers and creditors. His goal is to recover as much as possible to satisfy the maximum number of customer and general estate claims.

The first mandate of the SIPA Trustee is to make the customers of BLMIS with allowed claims financially “whole.” Under the statute, these customers have priority for distributions from the Customer Fund that is created to satisfy their claims, until they have received funds in amounts equivalent to their deposits in BLMIS, minus any withdrawals.

Those who withdrew more than they put into BLMIS in good faith do not have an allowed claim or priority for distributions at this time, but they do have a general creditor claim for fraud. All good faith customers of BLMIS, and other creditors in the liquidation such as service providers and vendors, have general claims against the BLMIS General Estate.

In addition, all good faith BLMIS customers who filed claims – whether their net equity customer claims were allowed or denied – are general creditors of the BLMIS estate under the auspices of the SIPA Trustee and do not need to file additional claims.

Once the SIPA Trustee fully satisfies the net equity claims of BLMIS customers, the next step in the BLMIS liquidation is to distribute customer property in accordance with the other priorities in SIPA. Recoveries will become allocated to the General Estate and will be distributed pro rata to general creditors in the order of priority established in the Bankruptcy Code after the SIPA Trustee has met the duties outlined under SIPA, which first include fully satisfying the net equity claims of BLMIS customers and reimbursing the cash advances paid to customers by Securities Investor Protection Corporation (SIPC), and later reimbursing SIPC for administrative expenses.

In the BLMIS liquidation, SIPC has made cash advances – up to a maximum of $500,000 – available to the court-appointed SIPA Trustee to distribute to customers with allowed claims, as a way to expedite financial relief to these customers. As of Novemer 20, 2014, SIPC has committed approximately $816.2 million to the BLMIS liquidation for this purpose. SIPC-committed advances will continue to increase as claims that are currently in litigation are allowed as a result of settlements or the conclusion of litigation. According to the provisions of SIPA, SIPC is reimbursed for its advances to customers once each respective customer claim is fully satisfied. As of the fourth pro rata distribution in the BLMIS liquidation proceeding, SIPC received $114.1 million in reimbursement from the BLMIS Customer Fund for advances paid on fully satisfied claims, leaving $702.1 million in SIPC advances outstanding.

One hundred percent of the SIPA Trustee's recoveries will be allocated to the Customer Fund for distribution to BLMIS customers with allowed claims. The reimbursements to SIPC are for the cash advances to BLMIS customers with allowed claims which are made when the BLMIS customer claim is first allowed.

How does the BLMIS situation affect my income taxes? Can I recover taxes I paid on phantom gains? Can I use losses to offset other income? Do I have to pay taxes on any SIPC-funded advances from the SIPA Trustee or on distributions from the Customer Fund?

Every situation is different, so please consult with your tax advisor.

The SIPA Trustee says funds will be returned based on the “net equity” methodology. How is “net equity” defined?

“Net equity” in this instance is the difference between BLMIS customers’ cash deposits and withdrawals. This time-tested method to determine losses in Ponzi schemes has been used many times before in similar cases.

Some BLMIS customers, over time, withdrew more than they had actually deposited. Because they received more money from BLMIS than they actually invested, they are often referred to as “net winners.” Other BLMIS customers withdrew less than they had deposited or none at all. Because they got little or none of their money back, they are often referred to as “net losers.”

Under the SIPA statute and U.S. Bankruptcy code, BLMIS net losers have a priority position to receive pro rata distributions from the Customer Fund and must be made “whole” first. This is the only way to achieve a level of equity among defrauded BLMIS customers.

The SIPA Trustee will continue to pursue the return of monies received by BLMIS customers over and above their actual investment, for distribution to “net losers.” The SIPA Trustee understands that many “net winners” acted in good faith when they withdrew funds. Nevertheless, even if acting in good faith, BLMIS customers who withdrew more than they deposited are still in possession of funds that belong to other BLMIS customers and they must, if possible, return excess funds for distribution to those who lost all or a portion of their original BLMIS deposits.

As noted elsewhere on this website, the SIPA Trustee also understands that some of the good faith “net winners” have extenuating circumstances regarding their financial situations, and that returning all or even some of the excess funds they withdrew may represent hardship. The SIPA Trustee, in these cases, has discretion to dismiss actions seeking excess funds, and he has exercised this discretion more than 200 times since December 11, 2010 via the Hardship Program.

Certain parties disputed the SIPA Trustee’s “cash in, cash out” formula and pursued appeals at all levels that would seek to use the fictitious November 2008 BLMIS statements in determining the value of the claims. The legal actions of these appellants were not only without any precedent or basis in law, but were also responsible for reducing and delaying distributions, especially to the hardest-hit of the BLMIS customers.

On March 1, 2010, the United States Bankruptcy Court for the Southern District of New York granted the SIPA Trustee’s motion for an order denying customer claims for amounts listed on last customer statement and affirming the SIPA Trustee’s determination of net equity. On August 16, 2011, the United States Court of Appeals for the Second Circuit upheld the net equity methodology for determining the value of claims. Petitions for a panel rehearing of that decision, or, in the alternative, for rehearing en banc, were denied. Three petitions for writs of certiorari were filed with the Supreme Court of the United States requesting further review of the net equity decision. On June 4, 2012, one of the writs of certiorari was withdrawn, a result of settlement with the SIPA Trustee. On June 25, 2012, the Supreme Court refused to grant the petitions, thereby upholding the net equity methodology and resolving the matter.

 

Why are you only looking back to 2002 for fictitious profits? Maybe there were deposits and withdrawals that occurred prior to that.

The records kept by BLMIS were quite extensive and date back for decades. However, under New York State law, in most cases, the SIPA Trustee can only pursue customers who withdrew more than they deposited, and the excess withdrawals must have occurred in the six years prior to the discovery of the fraud, or, in this case, since December 11, 2002.

Where can I go for information about any criminal investigations related to BLMIS?

For information concerning the criminal cases arising out of the Madoff Ponzi scheme, please consult the website of the United States Attorney’s Office for the Southern District of New York at www.justice.gov.

ROLE OF SIPC

Doesn’t the government insure investors against such schemes?

The Securities Investor Protection Act (SIPA) is the law that governs liquidation proceedings of failed brokerage firms. While the Securities Investor Protection Corporation (SIPC) is the supervising organization for SIPA, it is not the securities industry equivalent of the Federal Deposit Insurance Corporation (FDIC).

When a brokerage firm is closed due to bankruptcy or other financial difficulties and customer assets are missing, SIPC steps in as quickly as possible and works with the court-appointed SIPA Trustee to return customers’ cash or other existing assets. SIPC has the authority to administer funds to customers of failed brokerage firms as an advance against recovered assets. The current limit on any SIPC-administered advance is $500,000. SIPC, which is funded by brokerage firms, is neither a government agency nor a regulatory authority.

Bernard Madoff operated a Ponzi scheme through BLMIS. The essence of a Ponzi scheme is that customer requests for withdrawals from their accounts are satisfied by money taken from other customers. As a result, the only recoveries possible are customers’ cash deposits.

In the BLMIS Ponzi scheme, customers who withdrew money from their Madoff investment accounts were not withdrawing actual returns from actual investments; it was money stolen from other customers. There were no securities traded and the securities positions shown on the BLMIS statements were fictitious.

SIPA provides some protection to restore actual cash and securities lost in brokerage liquidations, but there isn’t any industry or government agency in the U.S. that “insures” against losses on fictitious profits in a Ponzi scheme.

For more information about SIPC, visit http://www.sipc.org.

What is SIPC's role in the ongoing Madoff liquidation proceeding?

Under the Securities Investor Protection Act (SIPA), the Securities Investor Protection Corporation (SIPC) specifies and the District Court appoints a SIPA Trustee whose job is to oversee the liquidation as directed by the law, to recover assets stolen in the fraud and to assemble the largest Customer Fund and General Estate possible so that all Bernard L. Madoff Investment Securities LLC (BLMIS) customers and creditors, as designated by the statute, can ultimately receive some compensation for their losses as a result of the unprecedented Madoff Ponzi scheme.

Cash advances to customers: In the BLMIS liquidation, SIPC has made cash advances – up to a maximum of $500,000 – available to the court-appointed SIPA Trustee to distribute to customers with allowed claims, as a way to expedite financial relief to these customers. As of November 20, 2014, SIPC has committed approximately $816.2 million to the BLMIS liquidation for this purpose. SIPC-committed advances will continue to increase as claims that are currently in litigation are allowed as a result of settlements or the conclusion of litigation. According to the provisions of SIPA, SIPC is reimbursed for its advances to customers once each respective customer claim is fully satisfied. As of the fourth pro rata interim distribution in the BLMIS liquidation proceeding, SIPC received $114.1 million in reimbursement from the BLMIS Customer Fund for advances paid on fully satisfied claims, leaving $702.1 million in SIPC advances outstanding.

One hundred percent of the SIPA Trustee's recoveries will be allocated to the Customer Fund for distribution to BLMIS customers with allowed claims. The reimbursements to SIPC are for the cash advances to BLMIS customers with allowed claims which are made when the BLMIS customer claim is first allowed.

In addition, SIPC advances monies from its financial industry-supported administrative fund for the work of the SIPA Trustee, his counsel and consultants as well as for the costs of administrating the liquidation. No fees or costs of administration are paid from recoveries obtained by the SIPA Trustee for the benefit of Bernard L. Madoff investment Securities LLC (BLMIS) customers with allowed claims.

I thought that SIPC could only give an advance of up to $100,000 when claims represented cash. Why are Madoff customers with allowed claims receiving $500,000?

At the time the liquidation commenced, the SIPA Trustee and SIPC elected to pay BLMIS customers the maximum advance of up to $500,000 against allowed claims.

AVOIDANCE ACTIONS

What can you tell us about the status of the "good faith" avoidance actions?

The SIPA Trustee was required by law to file most of these lawsuits by the second anniversary of the fraud’s discovery, which was December 11, 2010. Litigation against any Madoff customer is still considered the last resort, as the SIPA Trustee and his counsel prefer to work with each customer or their representatives, review their unique circumstances and arrive at an amicable resolution.

If extenuating financial or personal difficulties exist, the SIPA Trustee continues to urge those who believe they qualify to apply for the Hardship Program. The SIPA Trustee has also extended the time for applicants to answer or otherwise respond to avoidance action complaints while their hardship applications are pending.

In addition to dismissing cases as a result of demonstrated hardship, the SIPA Trustee has also not pursued cases in which the potential funds to be gathered doesn’t justify the effort required.

Finally, the SIPA Trustee has sent a last letter to avoidance action recipients who have not responded and are technically in default, giving them one last chance to begin negotiations.