Judge Decides Some Madoff Victims Are Out of Luck

On Monday, some of Bernard Madoff's former clients received bad news, as bankruptcy Judge Burton R. Lifland decided that many of them are not eligible to receive compensation for their losses. The ruling, which seems likely to be appealed, endorsed the methods established in April 2009 by Irving Picard, trustee for the case.

Picard decided to use a "cash in/cash out" measure to determine which of Madoff's victims deserved compensation and which might be liable for some of the investment company's losses. Under this system, Picard measured customers' losses by weighing their withdrawals against their deposits; people who received less money than they deposited were net losers, while those who received more money than they deposited were net winners.

Other members of Madoff's fund have received even worse news: In the last few years before Madoff's scheme came to light, many of his customers withdrew their money under suspicious circumstances. This trend accelerated in the last three months of 2008, when Madoff's friends and family withdrew $735 million from the fund. If these customers withdrew money because they knew or suspected that the Madoff fund was a fraud, they may be guilty of fraudulent conveyance, which could make them legally responsible for returning at least part of their money.

Madoff's net winners have argued that Picard's cash in/cash out method is unfair and that they should be compensated based on their account balances at the time of Madoff's arrest. In his published opinion, Lifland's noted that his decision was based on the fact that Madoff's account statements were entirely fraudulent

Judge Lifland's decision also limits the number of victims who can claim recompense from the government. While Madoff's former clients are each eligible for up to $500,000 from the Securities Investor Protection Corporation (SIPC), if Lifland's decision stands, Madoff's net winners will not be able to claim SIPC compensation. Given that more than half of Madoff's clients are net winners -- Picard has identified 2,568 net winners and 2,335 net losers -- this will have a major effect on the ultimate dispensation of the case. It will also have a major impact upon the ultimate cost to taxpayers.

But even Picard's net losers are unlikely to get their money back: while Lifland's decision drops the fund's losses from $65 billion to $20 billion, investigators have only recovered $1.5 billion thus far, suggesting that some of Madoff's biggest victims may still be left out in the cold.

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