Securities Law

Repayment Plan for Madoff Victims Puts Total Ponzi Scheme Loss at $20B

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Victims of Bernard Madoff’s stunning Ponzi scheme argued that they should be reimbursed based on the balances shown in their investment statements for his purported hedge fund.

But U.S. Bankruptcy Judge Burton Lifland sided with trustee Irving Picard, agreeing that investors’ losses should be calculated simply by adding up the cash invested and subtracting any withdrawals, reports the New York Times.

The statements “were bogus and reflected Madoff’s fantasy world of trading activity, replete with fraud and devoid of any connection to market prices, volumes, or other realities,” the judge says in his written opinion (PDF) today.

Under this “cash in, cash out” approach, the total losses to all of Madoff’s investors totaled a little over $20 billion, according to Picard. Earlier estimates of a $65 billion Ponzi scheme orchestrated by Madoff, who is now serving a 150-year federal prison term, were based on purported account balances in the statements investors received, the Times reports.

Lifland’s opinion also calls for “net winners” who took out more money than they paid in to receive nothing, reports the Wall Street Journal (sub. req.).

Lawyers representing net winners argue that federal statutory and case law concerning the liquidation of brokerages calls for victims to receive compensation based on their most recent account statements. This interpretation, if accepted by the 2nd U.S. Circuit Court of Appeals, could allow net winners to obtain advances of up to $500,000 from Securities Investor Protection Corp., which covers customers of failed brokerages, the Journal notes.

Related earlier coverage:

Dealbook: “Madoff Investors Sue SIPC Chief Over Claims”

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