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Friday, June 14, 2024 | Back issues
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Madoff Victims Won’t See Interest on Recovery

(CN) - Victims of Bernard Madoff's Ponzi scheme are not entitled to interest or inflation adjustment on the funds they recover, the 2nd Circuit ruled.

With Madoff serving 150 years in prison after his 2009 conviction for orchestrating the largest Ponzi scheme in history, and $170 billion forfeiture order hanging over his estate, a court-appointed trustee for Bernard L. Madoff Investment Securities LLC has spent the last several years trying to track down and redistribute the money.

Investors who lost $20 billion when the Ponzi scheme collapsed had claimed that they are also due interest or inflation adjustment on the distributions they receive from the bankruptcy estate, but U.S. Bankruptcy Judge Burton Lifland ruled against them and the 2nd Circuit affirmed otherwise.

Such relief is not available because the Securities Investor Protection Act (SIPA) does not permit adjustment to reflect the time-value of money, according to the ruling from the federal appeals court in Manhattan.

"SIPA's silence is unsurprising," Judge Chester Straub wrote for a three-judge panel. "In a typical broker-dealer failure, an inflation adjustment to net equity would be nonsensical; where securities are actually purchased for a broker-dealer's customers, the securities have values that already incorporate economic circumstances such as inflation."

The act was not written directly to address broker-dealer fraud under circumstances where customers' money was never invested, as in this case, the court found.

"Although SIPA defends investors from a broker-dealer's failure to perform its custodial role over customer property, it does not otherwise shield investors from loss," Straub wrote. "Instead, the act merely restores investors to what their position would have been in the absence of liquidation."

The Securities and Exchange Commission had supported the investors' position, but the court said it owed "no deference" to the SEC's view, as it is "novel, inconsistent with its positions in other cases, and ultimately unpersuasive."

Amanda Remus, a spokeswoman for BLMIS trustee Irving Picard, told the New York Times the ruling was "an important milestone" in recovery efforts for investors.

Picard was "hopeful that further delay will be viewed as pointless" and no further appeal will be pursued, enabling over $1 billion to be distributed to customers with allowable claims, Remus told the Times. She said the money had been held in reserve.

So far, Picard's office has recovered more than $10.5 billion, with $7.2 billion and counting paid out.

This past December, the 2nd Circuit found that Picard's "clawback" powers could not reach these ficticious profits earned by hundreds of "preferred" Bernard L. Madoff Investment Securities LLC clients.

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