Jackson Jambalaya

A minor miracle took place in the Bernie Madoff case: the federal government managed to recover 75% of the money stolen by the convicted fraudster.  The Wall Street Journal reported on November 30:

Irving Picard, clean-shaven and measured of speech, is 77. He is the court-appointed trustee who oversees a labyrinthine effort to recover money stolen from investors by Bernard L. Madoff, currently serving a 150-year sentence for running the most massive Ponzi scheme in history. David Sheehan, gray-bearded, is 74. By far the more talkative, he is chief counsel to Mr. Picard, in the latter’s role as Madoff trustee. Since their appointment on Dec. 15, 2008, the two have done nothing else, day after day, but look for and claw back ill-gotten Madoff loot.

Of the $17.5 billion or so of stolen money for which claims have been filed, they have recovered $13,305,106,370.07. (Try saying that aloud.) That’s a little over 75 cents on the dollar, which is remarkable, considering that when they started Mr. Picard expected to recover “5 to 10 cents on the dollar,” which is “typical in a Ponzi-scheme case.” Mr. Picard—who has been the trustee in 10 previous broker liquidations, more than anyone in the country—says that “about 70%” of his job as Madoff trustee is done. His goal is to get to 100% recovery, although he concedes “this may not be realistic.” ....

Mr. Sheehan has met Madoff “10 or 12 times” at his prison in Butner, N.C. Will he see him again? “I hope not,” Mr. Sheehan sputters. He calls Madoff “a sociopath” and adds: “He didn’t think he was harming anybody. He actually thought his scheme would work, that it just got out of hand and he couldn’t control it.”

Even so, five more years on the Madoff treadmill wouldn’t exactly be a hardship for Messrs. Picard and Sheehan, as they each get paid around $1,000 an hour. They employ 200 hourly workers, 45 to 60 of them full-time, at an average wage of $430. The two men are quick to point out that none of these emoluments come at the expense of defrauded investors. Instead, they’re reimbursed by the Securities Investor Protection Corp., a nonprofit insurer created by Congress and funded by assessments from brokers and dealers.

Mr. Sheehan says he and Mr. Picard have earned every cent: “The trustee and his counsel put together the pieces of the puzzle of this massive fraud and developed the case from the ground up. Given the enormity of the task and the strength of defenses”—some of America’s top firms have represented the defendants—“our legal fees were a wise investment and totally necessary to the recovery of over $13 billion.” All the money they recover, Mr. Picard emphasizes, “goes to the victims.”...

Mr. Picard, who prefers to speak only when spoken to, offers a rare interjection: “We’d heard that there were $65 billion of losses, but we found out pretty quickly that that was a fictitious number.” Bernard L. Madoff Investment Securities LLC didn’t have remotely the right number of securities on deposit at the central depository for all the bulging accounts it had. “I’ll give you an example,” Mr. Picard says. “There should have been, say, 19 million shares of Verizon, but there were really only 300 to 400 of them. So that’s when we got the feeling that this was going to be a very difficult case.”

The trustee and his team had to uncover every trace of wrongdoing themselves. “Nobody told us what was going on,” Mr. Sheehan says. It became apparent that there was a careful strategy by both Madoff and the people who had enabled him—the many “feeder funds” that took investors’ money to Madoff—to sell the company to the public as a legitimate investment vehicle. “So the funds went to investors, got their money, and invested with Madoff at no risk to themselves. The only people with risk were the customers, who were kept in the dark as to what he was doing.”

Then, just as their task was starting to look Sisyphean, a gift arrived on their doorstep—“a big, pivotal point in the case,” in Mr. Sheehan’s words. In May 2009, Spain’s Banco Santander offered $235 million to settle potential legal claims resulting from the funneling of $3 billion of its clients’ money to Madoff by one of its subsidiaries, Optimal Investment Services.

“Compared to what we’ve recovered so far,” says Mr. Sheehan, “that doesn’t seem like a lot.” It was about 7.3 cents on the dollar, within the usual 5- to 10-cent range. “But at that point, we’d just gotten the case. And we were digging in. Then somebody shows up and offers us $235 million.” As a result of this voluntary surrender, “we became keenly aware of the fact that there must be other defendants out there, similarly situated to Optimal. The settlement had the benefit of enlightening us.”

The Optimal breakthrough came five months into the investigation. “We were still very much in the early discovery phase of what the bad acts were,” Mr. Sheehan says. “But when somebody that really wasn’t on our radar at that point shows up and offers that kind of money, we realized that all this investigative work we were doing was only going to expand, and that all of those defendants out there were going to realize that we’re not going to go away.”

A second pivotal episode occurred in December 2010, with a settlement recouping $7.2 billion from the estate of Jeffry Picower, an investor who withdrew $5.1 billion in “profit” from Madoff’s company and thus was the single largest winner in the sprawling scam. Mr. Picard had argued that the money was owed because Picower, who died in 2009, knew or should have known that Madoff was operating a fraud. The mammoth settlement “did a number of things for us,” Mr. Sheehan says. “One, it was a great impetus for others to come forward and settle, and some did. It spoke volumes to everybody else out there that if they continued to fight us, they’d have to pay as well.”

The Picower settlement—including some $2 billion in principal, which went to the government—“was a big chunk of money,” Mr. Picard understates. It gave the Madoff trustee’s team “a real fund to work with, to distribute to customers.” And it helped Mr. Picard realize that his initial estimate for recovery was, pleasantly, wrong.

Why is the clawback in the Madoff case proving so much healthier than in previous Ponzi schemes? “I think it’s because Madoff was able to continue the scheme for decades,” Mr. Sheehan says, “and we have records that go back to the late 1970s that prove this.” Mr. Sheehan cites Picower as an example.

“Picower’s estate effectively paid back everything he took out in profits from Madoff. Now in a normal case, where a Ponzi scheme is in existence for 18 months or two years, an investor probably wouldn’t have a lot of money. Picower, like a lot of investors, was a wise man. He took his ill-gotten gains and used those to invest in the real market. He knew better.” So his estate was able to “cash in oodles of his Apple stock” and settle. Mr. Sheehan says there are “many, many defendants that are like that, that have the cash and can pay us. And a lot of them don’t want to be smeared with the Madoff case, so they settled.”

Mr. Picard won a key legal victory in August 2011, when the Second Circuit upheld the method he and his team devised to determine how to handle claims. Madoff investors who took out more money from the fund than they deposited would have no claim, and would instead be liable to return their Ponzi-inflated gains. Only net losers would receive payments from money recovered by the trustee. As a result, there have been some “good-faith defendants,” as Mr. Sheehan calls them. “It’s sort of a misnomer. We call them that because we don’t have to prove they knew anything about the Ponzi scheme to get their money back. What they got was fictitious profit.”... Rest of article.