MANHATTAN (CN) – The 2nd Circuit has lent its support to a plan for compensating victims of Bernard Madoff’s massive Ponzi scheme, as proposed by trustee Irving Picard.
“Essentially, Mr. Picard has been charged with sorting out decades of fraud,” Chief Judge Dennis Jacobs wrote for a three-judge panel. “The question presented by this appeal is whether the method Mr. Picard selected for carrying out his responsibilities under SIPA [the Securities Investor Protection Act] is legally sound under the language of the statute. We hold that it is. Accordingly, we affirm the order of the United States Bankruptcy Court for the Southern District of New York.”
Picard’s methods call for crediting the amount of cash deposited into customers’ accounts with Madoff, less any amounts withdrawn from it. Under this system, only those victims who deposited more cash into their investment accounts than they withdrew have allowable claims.
Some Madoff investors complained that this method will leave out the “net winners,” who will have to return – after paying taxes for – the illusory profits they thought they earned.
These investors suggested being compensated based on their last customer statements.
The U.S. Bankruptcy Court rejected that alternative, finding that the “entirely fictitious” final statements could not “be relied upon to determine net equity” and did “not reflect actual securities positions that could be liquidated.”
The federal appeals court agreed with that reasoning.
“The trustee properly declined to calculate ‘net equity’ by reference to impossible transactions,” Jacobs wrote. “Indeed, if the Trustee had done otherwise, the whim of the defrauder would have controlled the process that is supposed to unwind the fraud.”