​Stakeholders in the Madoff Scandal and Their Need to Act Promptly and Proactively – Indirect Stakeholders – Installment 12

July 2, 2009Articles White Collar Defense & Compliance Blog

This is the twelfth in a series of installments on this blog that is discussing issues that face the manifold stakeholders who have been materially affected by the long and worldwide Ponzi scheme scandal of Bernard L. Madoff. All potential stakeholders should consult professional advisors promptly to have their positions evaluated.

Installments 3 through 8 and Installment 10 of this series focused on the specific concerns of charities that were victims of Madoff and similar schemes. Installments 9 and 11 addressed concerns of an Indirect Individual Investor (“III”) who has been embroiled in the Madoff scandal, but not as a result of a direct investment with him.

This Installment is intended to recognize the noteworthy unrelated events of this week in the Madoff scandal. On Monday, June 30, Federal District Judge Denny Chin in Manhattan sentenced Madoff to 150 years in federal prison for his crimes that were characterized by the Judge as “extraordinarily evil.” The Judge cited three symbolic reasons for the maximum sentence that he imposed on the 71-year-old Madoff. They were retribution, deterrence and justice for the victims. I would add a fourth need arising from the Madoff matter itself: the warning to any potential co-conspirators to come forward and cooperate in order to avoid a harsh sentence if later convicted. Such cooperation could raise the level of assets that can be made available to provide restitution to stakeholders.

There may be finality to the criminal case involving Madoff himself, except for his possible appeals to reduce the length of the sentence, which may be moot in any event in light of his age. However, while this result may give some closure and perhaps even “psychic income” for stakeholders who were victimized by Madoff, it provides no economic benefit to assuage their losses, other than perhaps encouraging collaborators to cooperate. More important for their situation is that on Thursday, July 2, the deadline came for filing claims by victims for recovery under the Securities Investor Protection Corporation (“SIPC”), the federal insurance agency for the securities brokerage industry.

On June 29, 2009, Eric Konigsberg wrote an article in The New York Times entitled “Investors Compete for a Piece of the Madoff Pie,” in which Mr. Konigsberg chronicled the staking out of claims for a portion of the limited funds available for victims with highly diverse and complex factual patterns as to how and how much money they lost with Madoff. Those who are IIIs, for example, have been told by Irving H. Picard, the trustee for Madoff’s assets, that they cannot make a separate SIPC claim. Mr. Konigsberg describes these stakeholders as believing that “they are being treated as members of a lower caste, in that many of them went through feeder funds because they lacked the requisite $1 million or $2 million minimum to go straight to Mr. Madoff.” The article reports that Mr. Picard encouraged such IIIs to file claims in any event for later court cases and that 8,800 claims were already filed of an estimated tens of thousands.

The criminal case against Madoff is finished; other criminal or regulatory actions may be brought against putative collaborators with Madoff in the future. However, those who are economic stakeholders must maintain close contact with the economic developments in the matter as they occur. Because the ultimate “pie” will be far less than the aggregate of slices that are being sought, victims should seek professional interpretations and advice as the inevitably complicated processes and determinations unfold.

[To be continued in Installment 13]