MESSAGES FROM THE SIPA TRUSTEE’S CHIEF COUNSEL, DAVID J. SHEEHAN
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November 27, 2013
Two Approaches, Shared Goals
Recently, the Special Master of the Department of Justice’s Madoff Victim Fund (MVF), Richard C. Breeden, announced his approach to the distribution of forfeited monies to certain victims of Madoff’s Ponzi scheme. The MVF currently holds approximately $2.35 billion of forfeitures that have been obtained by the United States Attorney's Office for the Southern District of New York in cases related to the Ponzi scheme operated through Bernard L. Madoff Investment Securities LLC (BLMIS). READ MORE

David Sheehan A Message from the SIPA Trustee’s Chief Counsel, David J. Sheehan

Note: As of March 25, 2014, the SIPA Trustee has recovered or entered into agreements to recover $9.795 billion; the Madoff Victim Fund (MVF) holds approximately $4 billion; and on March 25, 2014, the SIPA Trustee filed a motion seeking Bankruptcy Court approval for a fourth pro rata interim distribution that would total approximately $349.0 million, bringing total distributions, including SIPC advances, to almost $6 billion, or at least 46.036 percent of the customer’s allowed claim amount.

November 27, 2013 - Recently, the Special Master of the Department of Justice’s Madoff Victim Fund (MVF), Richard C. Breeden, announced his approach to the distribution of forfeited monies to certain victims of Madoff’s Ponzi scheme. The MVF currently holds approximately $2.35 billion of forfeitures that have been obtained by the United States Attorney's Office for the Southern District of New York in cases related to the Ponzi scheme operated through Bernard L. Madoff Investment Securities LLC (BLMIS).

The MVF is separate from the $9.508 billion that has been recovered to date by the Securities Investor Protection Act (SIPA) Trustee Irving Picard. Because the liquidation of BLMIS is a SIPA liquidation, the SIPA Trustee’s approach to the distribution of recovered monies is governed by the Securities Investor Protection Act and the Bankruptcy Code.

To date, the SIPA Trustee has distributed approximately 42.86 percent from the BLMIS Customer Fund, for a total of $4.833 billion returned to BLMIS customers with allowed claims. This is in addition to the approximately $811 million in cash advances SIPC has committed to speed financial relief to BLMIS customers with allowed claims. Further distributions will occur upon the resolution of certain pending legal disputes as well as upon the resolution of the SIPA Trustee’s lawsuits. Since the start of the claims process in January 2009, the SIPA Trustee and the Securities Investor Protection Corporation (SIPC) have collaborated to return recoveries to BLMIS customers with allowed claims as quickly as possible, without one penny of associated costs coming out of these resources.

As outlined by Mr. Breeden, the Special Master’s distribution approach differs in some ways from the approach mandated by SIPA, and these differences have raised a number of questions. In this letter, we will address questions surrounding distributions in the SIPA liquidation of BLMIS to “indirect” investors, a large group of individuals and entities who invested in “feeder funds,” which in turn funneled money to BLMIS. We hope the following brings clarity to this matter and the extraordinary steps the SIPA Trustee is taking to ensure recoveries are distributed to indirect investors in this unprecedented liquidation.

At the outset, we want to emphasize that the end goal of both the Special Master’s and the SIPA Trustee’s distributions is the same: to return principal lost in the fraud, as calculated by the net investment method, to its rightful owners in the most timely and efficient manner possible.

Based on reports regarding how the MVF will be administered, the Special Master intends to distribute recoveries based on net losses, or cash in versus cash out, both to those who invested directly in BLMIS and also to those who invested indirectly, through vehicles such as feeder funds, investment partnerships or family trusts. The Special Master does not expect to distribute recoveries to the feeder funds or other vehicles of the indirect investors; the only way a feeder fund is eligible to receive a payment from the MVF is if it invested its own money in BLMIS.

The Special Master correctly notes that this is different from the method used in the BLMIS liquidation. Basing his approach on SIPA, the SIPA Trustee makes distributions to allowed claimants who were actual customers of BLMIS – who had entrusted principal deposits with BLMIS – as of the December 11, 2008 filing date for the SIPA proceeding. This approach was affirmed by the Second Circuit Court of Appeals.

However, this does not mean that the individual, indirect investors in their respective feeder funds do not benefit from the SIPA Trustee’s distributions. In fact, in situations where the SIPA Trustee has approved a feeder fund’s claims, he has taken extensive steps to ensure that the money received by the feeder fund is distributed to its investors.

For example, the SIPA Trustee approved the claims of certain of the Tremont-managed funds (Tremont) in the approximate amount of $2.9 billion, after Tremont settled with the SIPA Trustee. And to date, the SIPA Trustee has distributed from the BLMIS Customer Fund to Tremont 42.86 percent of their allowed claims, totaling more than $1.2 billion.

(Due to a class action suit filed on behalf of Tremont investors, the approximately $1.2 billion from the BLMIS Customer Fund went to an escrow agent. Ultimately the distributions of the funds will be overseen by United States District Court Judge Griesa as part of the class action. The class action settlement is currently under review by the Second Circuit Court of Appeals.)

Once the class action settlement is resolved, the individual investors in Tremont will receive their shares of the $1.2 billion distribution from the SIPA Trustee. In addition, the SIPA Trustee structured the settlement with Tremont so that each time an additional BLMIS Customer Fund distribution is made, Tremont’s pro rata share of the distribution will go to Tremont’s individual investors pursuant to Judge Griesa’s orders.

Moreover, to ensure that Tremont investors receive the maximum benefit from the SIPA Trustee’s recovery efforts, the settlement agreement with Tremont specifically provides that none of the SIPA Trustee’s distributions can be paid to Tremont management for any purpose. This model has been and will be followed in future settlements with other feeder funds.

The SIPA Trustee’s approach is the approved avenue under SIPA, which has enabled the unprecedented recoveries and distributions in the BLMIS liquidation to date. BLMIS did not maintain – nor would it have any reason to maintain – records of either the identity of investors in various BLMIS feeder funds or, more importantly, the amounts invested by each feeder fund investor. Those records are likely maintained by the feeder funds, with which the investors have a legal relationship, and may show the identity of the customers and the amounts they are owed on a cash in-cash out basis.

The settlement with Tremont is just one example of the many nuanced and varied recovery and settlement agreements the SIPA Trustee has negotiated that involve indirect investors. Other instances have included small or family investment groups, LLCs and many others. Each situation is different. The SIPA Trustee evaluates the unique circumstances of each case and structures agreements to ensure that recoveries are passed through to the rightful owners appropriately.

Though the approaches by the SIPA Trustee and the Special Master may differ, the ultimate goal is the same: to return stolen monies to their rightful owners as quickly as possible. We hope this posting clarifies the differences between the distribution processes and we will provide further clarifications if the need arises.

Two Approaches, Shared Goals

November 07, 2012
International
A Ponzi scheme the size and duration of Bernard Madoff’s was only possible if he went global. The magnitude of his financial fraud still holds the world record, with approximately $17.5 billion in losses. Four years of investigation has revealed that Madoff’s Ponzi scheme is unprecedented in its global reach—our work reconstructing the fraud has taken us into more than 30 jurisdictions to date. READ MORE

David Sheehan A Message from the SIPA Trustee’s Chief Counsel, David J. Sheehan

November 7, 2012- A Ponzi scheme the size and duration of Bernard Madoff’s was only possible if he went global. The magnitude of his financial fraud still holds the world record, with approximately $17.5 billion in losses. Four years of investigation has revealed that Madoff’s Ponzi scheme is unprecedented in its global reach – our work reconstructing the fraud has taken us into more than 30 jurisdictions to date.

Reports have focused largely on the Madoff liquidation here in the United States, but from the beginning, we have been tracing the funds that flowed through Madoff’s Ponzi scheme throughout the world. Madoff money has moved through scores of jurisdictions, including Kuwait, Monaco, Panama, Singapore, South Korea, Taiwan, the Netherlands, and the United Arab Emirates. The Securities Investor Protection Act (SIPA) Trustee is actively involved in litigations, investigations and proceedings in France, Liechtenstein, Luxembourg, Austria, the United Kingdom, Spain, Gibraltar, and Israel. We are also pursuing stolen funds and chasing customer money throughout the Caribbean, from the British Virgin Islands to Bermuda and the Cayman Islands. The liquidation has confirmed the truest meaning of the phrase “Follow the money.” And we do. We have conducted a forensic investigation of tremendous scope, engaged and instructed international counsel, brought multiple legal actions in many international courts, and cooperated with local law and regulatory enforcement bodies around the globe.

We allege that a global community – the banks we have sued and the wealthy individuals we are pursuing – knew of and aided Madoff’s Ponzi scheme by creating structured financial products (often leveraged derivatives) tied to Bernard L. Madoff Investment Securities LLC (BLMIS) to sell to their favored clients in order to “take advantage” of the famous Madoff returns. In addition, “feeder funds” – almost all of them foreign-incorporated entities – also fueled Madoff’s Ponzi scheme, and many of them would eventually grow into major, seemingly independent enterprises, like Fairfield Sentry and Tremont.

International entities became an important component of Madoff’s sales pitch, helping convince customers that he was trading overseas. But Madoff didn’t just hang a shingle in London as part of a sales ploy. He also often covered losses in his trading operation indirectly with funds that were transferred from his New York investment advisory business (BLMIS) to his London-based Madoff Securities International Ltd. (MSIL) and then “laundered” and returned to the United States, a move called “round-tripping.”

The SIPA Trustee’s Racketeer Influenced and Corrupt Organizations Act (RICO) complaint against Sonja Kohn, her family and other related defendants such as Bank Medici, Bank Austria and UniCredit, is instructive as to how global financiers and institutions worked together and with Madoff to feed and perpetuate the Ponzi scheme. Through forensic accounting and exhaustive research, we have uncloaked this international web – which we call the Medici Enterprise – and revealed how these conspirators moved the money around the world and funneled it to Madoff. The Medici Enterprise alone fed more than $9 billion into the Ponzi scheme. And $5 billion of that amount came in after 2005, when UniCredit bought Bank Austria and Sonja Kohn’s Bank Medici and took the enterprise wholesale.

While the Medici Enterprise is among the more fascinating examples, it’s just one piece of the incredible international puzzle that is the Madoff Ponzi scheme. Here are a few more examples:

  • The British Virgin Islands and Bermuda are active for a number of reasons, chief among them the litigation with the Kingate feeder funds: Kingate Euro and Kingate Global, which account for more than $1 billion in potential recoveries.
  • In Ireland, we are working to secure money channeled to the Thema Fund, a major feeder fund that was fed in part by another closely related feeder fund that was also 100 percent invested with Madoff.
  • In the Cayman Islands, we are litigating with a “net winner” feeder fund against which we have a billion-dollar fraudulent transfer claim.
  • In Israel, we have active litigation underway against an individual who has attempted to transfer substantial funds to relatives in an attempt to prevent the SIPA Trustee from recovering them for the Customer Fund.
  • In Liechtenstein, we actively participate in several criminal proceedings in connection with the Medici Enterprise and have facilitated the freezing of millions of dollars held by Sonja Kohn, her family and their co-conspirator, Urszula Radel-Leszcynski.
  • In Austria, we also actively participate in several criminal proceedings as we seek to identify and pursue assets fed into the Ponzi scheme that passed through Sonja Kohn’s Bank Medici, Bank Austria, UniCredit, and their associated feeder funds.
  • In the United Kingdom, we have joined forces with the court-appointed liquidator of MSIL in a litigation that involves Sonja Kohn, members of the Madoff family and other MSIL directors and officers. Through this collaboration, we anticipate recovering substantial funds for the Estate.
  • Together with the liquidator of MSIL, the SIPA Trustee successfully sought a worldwide freezing order against Sonja Kohn, which has helped the liquidator identify and freeze approximately £27 million of her assets as legal actions proceed against her and other members of the Medici Enterprise.

All of these cases present an opportunity for significant recovery for BLMIS customers. While we are pursuing our cases in these jurisdictions with the same vigor as in the United States, it is worth noting that our international adversaries, like those here, are working to prevent the SIPA Trustee from recovering these monies for the Customer Fund and returning them to BLMIS customers.

When the liquidation of BLMIS began in December 2008, we faced an unprecedented challenge: uncovering the facts behind the decades-long Madoff Ponzi scheme, the largest financial fraud in history. Our world-class team of legal, accounting and investigative professionals had to start from scratch – with no assistance from the fraud’s perpetrators – to reconstruct the truth behind the massive, intricate financial fraud. That is challenging enough in our home country. And the complexity only grows when that work is multiplied in more than 30 international jurisdictions, each with its own unique legal system and financial regulations.

Also adding to the challenge is the organic evolution of legal systems in every jurisdiction over time, as certain cases reach the highest court level and subsequent decisions potentially affect existing proceedings. For example, the Rubin v. Eurofinance case, recently decided by the United Kingdom Supreme Court, reflects the second time in recent years that the issue of enforceability of foreign default insolvency judgments has changed – and changed dramatically. While decisions such as this can pose a challenge to the SIPA Trustee, they also highlight the fact that modern international insolvency law is in a constant state of flux as it tries to keep up with the ever-changing technological framework underlying modern financial transactions. We remain at the forefront of these new developments, ready to respond to these changes when they come, and to forcefully argue for innovation in the law when such changes are necessary and appropriate.

I hope this brief overview of our international litigation will help convey the strong effort we are making on numerous fronts in this multifaceted liquidation. Our worldwide push to maximize recoveries for the Customer Fund is ongoing, so please check back from time to time for an update on the activities of the SIPA Trustee and his global teams.

 

 

International

July 12, 2012
Claims
With the Supreme Court’s decision in late June to pass on a challenge to the equity calculation formula struck by the SIPA Trustee, the biggest hurdle to future distributions has now been removed. Though the occasion won’t make as many headlines as the collapse of Bernard Madoff’s Ponzi scheme, it should be big news that Madoff’s investors are finally going to be getting more of their money back. READ MORE

David Sheehan A Message from the SIPA Trustee’s Chief Counsel, David J. Sheehan

July 12, 2012 - With the Supreme Court’s decision in late June to pass on a challenge to the equity calculation formula struck by the SIPA Trustee, the biggest hurdle to future distributions has now been removed. Though the occasion won’t make as many headlines as the collapse of Bernard Madoff’s Ponzi scheme, it should be big news that Madoff’s investors are finally going to be getting more of their money back.

Unraveling the most massive global fraud of all time was never going to be an easy task, and at times progress has seemed frustratingly slow to Madoff’s victims. This is par for the course in any bankruptcy, with creditors fighting over a limited pool of assets available to satisfy their claims.

But the Madoff case has been orders of magnitude more complicated, due to the size, extent, and duration of the fraud. With so much money gone up in smoke the moment Madoff’s frauds were revealed, the legal infighting to recover false investment returns paid out by Madoff was destined to be fierce. There was also a real risk that the courts would hold much of the money to be beyond the reach of the Trustee, denying a meaningful recovery to those who hadn’t withdrawn funds before the collapse. Indeed, at the outset, some pundits expected recoveries of just pennies on the dollar and even that after a decade or more of litigation.

But the pundits were wrong. The results to date not only belie their worst-case scenario, but also reflect a recovery effort far more successful than nearly anyone expected.

The numbers truly speak for themselves. The Trustee has recovered or reached agreements to recover more than $9.1 billion for Madoff customers since his appointment in December 2008— equivalent to $7 million a day. These recoveries exceed prior recovery efforts related to all other Ponzi schemes, in terms of dollar value and percentage of stolen funds recovered.

But the best evidence may be the prices at which Madoff claims are trading on secondary markets. While many Madoff customers have held on to their claims, others sold them at a discount to investors so as to avoid the uncertainty and delay of the resolution process. To date, nearly $2.8 billion of allowed claims have been sold, the equivalent of approximately 40 percent of the claims allowed by the Trustee.

Since December 2010, when the Trustee announced a major settlement to recover money Madoff had paid out to investors before his firm collapsed, claims have been trading in excess of 60 cents on the dollar, an unusually high value in any bankruptcy case. And as more money has flowed to the Trustee, the value of Madoff claims has risen.

More of those recovered funds will soon be making their way to Bernard Madoff’s victims. To date, the Trustee has distributed more than $1.1 billion, with the first interim distribution in October 2011. That includes more than $802.3 million in advances requested on victims’ behalf by the Trustee.

But further distributions were stymied by legal challenges to the distribution formula meant to insure fair and equitable treatment of all Madoff’s customers. A small group of Madoff clients argued all the way to the Supreme Court that distributions should be based on the final set of account statements sent by Madoff Investments, reflecting years of fictional gains. That argument was soundly rejected by the Bankruptcy Court and Court of Appeals, and the Supreme Court’s decision not to hear their final appeal settles the matter once and for all.

It also clears the way for further distributions to victims over time, amounting to billions of dollars. Additional billions in recoveries may yet come from litigation over pending claims.

Making right Bernard Madoff’s wrongs has been a long and complex process, and it has been understandably frustrating to both his victims and the public. A quick recovery was never in the cards, given the depths of the investigations required to trace Bernard Madoff’s fraud and the fact that parties involved in the bankruptcy always have the right to challenge the Trustee’s actions through slow-moving litigation. But it is time for the focus to shift to the substantial and important progress that has been made as we continue working toward further success.

David J. Sheehan
July 12, 2012

Claims

May 18, 2012
Overview
Bernard Madoff’s unprecedented fraud stretched far and wide. Our recovery efforts and lawsuits are not only taking place here in the United States; our work extends around the globe, including Austria, England, France, Gibraltar, Italy, Liechtenstein, Luxembourg, Spain, and the Caribbean. READ MORE

David Sheehan A Message from the SIPA Trustee’s Chief Counsel, David J. Sheehan

Bernard Madoff’s unprecedented fraud stretched far and wide. Our recovery efforts and lawsuits are not only taking place here in the United States; our work extends around the globe, including Austria, England, France, Gibraltar, Italy, Liechtenstein, Luxembourg, Spain, and the Caribbean.

With so many actions and jurisdictions involved, this liquidation is one of the most complex recovery efforts ever undertaken. Thousands of parties are involved, and probably a comparable number of reporters, bloggers and assorted commentators are covering Madoff-related news worldwide. Given the number of participants in this unfolding story with differing agendas, it is not surprising that some of the public statements and coverage are misleading or incorrect.

With that in mind, I will use this column, today and in the future, to clarify and comment on key issues. In this message, I’d like to address two important topics that have gotten a great deal of media attention.

First and foremost, I want to emphasize that every penny of the more than $9.1 billion recovered thus far through our efforts will ultimately be distributed to BLMIS customers with allowed claims. The professional fees of the SIPA Trustee, Irving H. Picard, and those of his counsel are not paid for by any of the funds recovered for the BLMIS Customer Fund – all fees and expenses incurred by the SIPA Trustee and his counsel in pursuit of recoveries are paid for out of a fund maintained by the Securities Investor Protection Corporation. Any assertion to the contrary is just plain wrong.

Second, I’d like to provide a brief overview of the status of the appellate process that affects the timing of payouts from the Customer Fund. On December 17, 2010, the SIPA Trustee and the United States Attorney’s Office for the Southern District of New York announced a historic settlement with the estate of Jeffry Picower in the amount of $7.2 billion. Of that amount, $5 billion was recovered by the Trustee while the remainder was forfeiture to the U.S. government. It is undisputed that this entire amount constituted fictitious profits – other people’s money – which rightfully belongs to the BLMIS customers who have, in the aggregate, filed claims for the more than $17 billion in principal which they lost.

Almost a year and a half later, the Picower settlement remains under appeal. As a result, billions of dollars that would be available for distribution to victims who never got their money back are being held up. When the appeals are finally resolved, the $5 billion will become available for allocation to the Customer Fund.

Even when that happens, however, the SIPA Trustee would only be able to distribute approximately 12 percent of the recovered funds due to the outstanding appeal of the net equity issue. The Second Circuit Court of Appeals recently upheld the decision of Judge Burton R. Lifland of the United States Bankruptcy Court for the Southern District of New York, which affirmed the Trustee’s determination that in this liquidation, allowable customer claims, or “net equity” claims, are governed by the Net Investment Method – a “money in, money out” calculation formula. This means that those BLMIS customers who withdrew little or none of their principal are given a priority in distributions from the Customer Fund. Several parties sought to have the Second Circuit reconsider its opinion, but that request was denied. Currently there is an effort by appellants to have the ruling reviewed by the United States Supreme Court.

We believe that these appeals are without merit. Until they are finally concluded, however, the appeals inevitably delay the return of stolen funds to BLMIS customers. We will continue to do all we can to accelerate the process, clear the path and distribute funds as quickly as possible.

The SIPA Trustee’s primary goal is to make customers who have not yet received back all the funds they deposited into BLMIS whole. To that end, the SIPA Trustee and his counsel will continue to vigorously pursue all lawsuits, first, to fill the Customer Fund for the benefit of those customers who did not get their initial deposits back, and second, to create a General Estate in which all victims of Mr. Madoff’s fraud may share, excepting those who are found to have acted in bad faith.

To date, more than $1.1 billion has been returned to allowed claimants. While this may seem like a small step in the total recovery effort, it is just the beginning. We want to assure all of the victims of Mr. Madoff’s fraud that we will continue in our efforts to recover the maximum amount of funds possible, so that all victims may receive some recompense for the harms they suffered.

David J. Sheehan Updated May 18, 2012

Overview