Madoff and Merkin: A $410,000,000 Resolution

Photo from NY Times

We've written before about Ezra Merkin's hedge funds that fed Madoff billions of investor dollars. Merkin collected his fee and then apparently went to the beach to rest from his hard work. Occasionally he took a break from the beach and the golf course to write to his investors and tell them how he actively managed the funds.

Merkin has now settled part of the lawsuits against him for claiming to actively manage his funds and then giving Madoff the money. Here are some details from the NY Times...

Madoff and the SEC: Serious Conflicts Existed

The NY Times recently discussed the results of a report on the SEC showing that a lawyer with heavy involvement in the Madoff case had serious conflicts of interest. Here are a few key quotes from the article:

Winners and Losers in the Madoff Case

Irving Picard

Irving Picard, the trustee in the Madoff case, was in court last week as a panel of three judges heard arguments on whether net winners in the Madoff case ought to be able to collect money from the government. Net winners are those who took more cash out of Madoff's funds than they put in. Apparently, there are several of these guys who think they should get more money. Hmmmm.....

The WSJ had this to say about the case: "The judges' decision is likely to determine which Madoff customers may collect up to $500,000 apiece from the Securities Investor Protection Corp., an industry association created under federal law to insure investors in failed brokerages. It is also expected to affect how to divide billions of dollars Mr. Picard is recovering through legal settlements with people who withdrew money from the Ponzi scheme."

Now, it seems just a bit greedy to me that investors who got more money from Madoff than they put in would also be trying to collect from the taxpayers simply because Madoff sent them a statement showing they had more fictitious profits than they had already withdrawn! Apparently, the judges showed signs of wonder too as the WSJ reported the following:

How Should Madoff's Victims Be Compensated?

The government has an insurance fund that covers broker-dealer accounts known as the Securites Investors Protection Corp. (SIPC). The SIPC generally covers victims' losses up to $500k. As such, victims who had more than $500k invested with Bernie Madoff, will receive $500k from the SIPC plus the law allows for recovered assets to be divided among the victims based on a weighted average of their actual funds over $500k that they had deposited with Madoff.

There are two groups of victims in a Ponzi scheme such as that run by Madoff: net winners and net losers. The net winners took out more money than they put in. Under the current rules, this group gets nothing when a Ponzi scheme collapses and they may be asked to give some of their assets back to the net losers in what is known as a "clawback."As for the net losers, they are covered by SIPC and get a share of the recovered assets.

Some victims of Madoff are saying that they should be entitled to recoup what Bernie's statements showed they had in their account. In other words, suppose they put in $500k and never took any out. If they had the money with Bernie for, say, a dozen years or so, it would have supposedly grown to about $2 million. Now, these victims would love to get the SIPC to give them $500k and then to get some share of the recovered assets based on the additional $1.5 million that Bernie said was in their account. Under the current rules, they will get $500k and nothing else.

The question some lawmakers are asking is whether this is fair? Apparently, a few of our esteemed representatives in Washington don't think so. The WSJ reported recently that Rep. Paulk Kanjorski (D., Pa.) "would pursue changes to require the SIPC to fulfill claims of customers based on the account statements they received from failed broker-dealers." Well, I'm afraid the good Senator is confused about where money comes from. He must think the government can just print some up and give it to these victims without it hurting anyone else. Let's consider the options.

Madoff Net Winners Want More from Net Losers

Today's WSJ is reporting that the 'net winners' in the Madoff scam (i.e. those who withdrew more than they invested) are suing in an effort to collect more money. I find this amazing. First, these people got assets from the net losers already and now they want more. To get more, they will need to take it from someone else: either more from the net losers or from taxpayers. I personally hope they are required to give back through clawbacks any excess that they got above their investment so the losers have more to make them whole. If so, this group would break even which is better than all the others who are net losers. Maybe everyone should end up getting an equal percentage so everyone is an equal net loser. Then, in addition they could recover up to $500k from the government. That sounds fair to me...

In any case, the real losers are taxpayers. They didn't put in anything and have to give up some of their money.

Clawback Lawsuits For Madoff Victims Who Were "Net Winners"

Trying to clean up after a fraud is a messy affair.  Trying to clean up after the world's biggest ponzi scheme collapses is just downright nasty.  The WSJ reports that Madoff trustee Irving Picard is preparing to sue many of the Madoff victims who ended up in the black when all was said and done: