Litigation | February 22, 2009
First Meeting of Madoff Creditors On February 20, 2009, Irving Picard (the “Trustee”), the Court-appointed trustee for the liquidation of Bernard L. Madoff Investment Securities LLC (“BMIS”) pursuant to the Securities Investor Protection Act (“SIPA”), held the first meeting of the BMIS creditors. The following provides a summary of the statements made by the Trustee and David Sheehan, legal counsel to the Trustee (“Counsel”). It is not legal advice provided by Shearman and Sterling LLP. The Trustee’s statements represent the views of the Trustee and may be challenged during the course of the proceedings. Any interpretation of the Trustee’s statements would be specific to your set of facts and may require additional legal research. A videotaped copy of the meeting will be made available on the Trustee’s website at www.madofftrustee.com.
Overview The Trustee convened the meeting explaining that because the Madoff matter involves a crime, his
administration of the case. Those reports will be publicly available. The filing date for all purposes is December 11, 2008.
team is operating from a crime scene, which presents certain hurdles. He noted that he is limited in what he can say because of the ongoing criminal
Case Administration and Investigation
investigation. His team is working closely with the
The Trustee has commenced an investigation into
FBI, the U.S. Attorney’s Office, the SEC and other
the operations of BMIS and its assets, and will be
investigative authorities in a cooperative environment.
working with the joint liquidators of Madoff
He then proceeded to describe the factual and procedural background of Madoff’s arrest and the proceedings that resulted from that arrest, including the liquidation. He explained that the primary purpose of the proceeding is to get money back to customers who have lost their investments.
Securities International (“MSI”) in the United Kingdom. He has begun the process of serving subpoenas on parties involved with the Madoff operation to obtain documents so that his team can piece together what really occurred during the course of BMIS’ operation. The Trustee has located records at BMIS’ Third Avenue headquarters, an off-
Going forward, the Trustee will provide periodic
site warehouse, and a back-up location. He
reports to the Bankruptcy Court on the status of the
inventoried over 7,000 boxes at the warehouse.
NYDOCS03/879375.3
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The Trustee is currently locating the assets of BMIS
property and all recoveries received by the Trustee
in order to monetize them for distribution to
will be set aside for future allocation and
customers. The Trustee has so far recovered
distribution to customers.
approximately $650 million in cash, $124 million in proceeds from the sale of securities, and $166 million of securities that are being held because
Customer Claims Process
their maturity dates are within the next few months.
The Filing of Claims
According to the Trustee, the securities were not purchased for customer accounts but were instead in the market-making proprietary accounts.
The Trustee stressed that the only relevant date for filing claims is July 2, 2009. All claims received by the Trustee on or before July 2 that are allowed will
In terms of assets, the largest asset appears to be the
receive SIPC protection. Any claims received after
independent market-making operation. The Trustee is
that date will be disallowed in their entirety.
in the process of receiving bids. He hopes to go to the Bankruptcy Court in the next few weeks for approval. He is also working with an art consultant to value the artwork owned by BMIS and determine whether to hold or sell in view of current market conditions.
According to the Trustee, the March 4, 2009 “preferred” date is irrelevant in this case. He explained that in ordinary SIPA proceedings, if an investor files by the earlier “preferred” date, the investor is entitled to receive securities to replace
The Trustee is looking at Madoff, every member of
those lost. Filings between the “preferred” date and
his family, and all of their close associates to
the “bar” date provide the trustee with the discretion
determine whether their personal assets should be
to replace missing securities with cash equivalent to
returned as customer property. Counsel explained
the value of the missing securities on the date the
that the Madoff businesses had three floors; only
liquidation proceeding was filed, or with
one of which, the 17th floor, was used for the
replacement securities.
nefarious activities. That floor was under lock and key so there was very limited access. Part of their investigation, therefore, centers on who had access to the 17th floor.
Here, the Trustee stated, for some substantial time (perhaps thirteen years and possibly longer), there is no evidence to suggest that Madoff purchased securities for customer accounts. Accordingly, the “preferred date” is irrelevant.
Costs of Administration
Because no securities were purchased, the Trustee
The Trustee repeatedly emphasized that all costs of
will not rely on the November 30, 2008 account
the administration of the liquidation are paid from
statements. He noted that the profits reported on
funds from the Securities Investor Protection
those statements are fictitious. Instead, the Trustee
Corporation (“SIPC”). Those costs include the
will calculate customers’ “net equity” on the basis of
Trustee’s fees, his counsel’s fees, wages of remaining
amounts deposited less amounts withdrawn. In
BMIS employees, fees for experts and consultants,
other words, those customers who deposited more
and the costs of any litigation to recover assets.
money with the debtor than they withdrew have a
Unlike the procedures in non-SIPA bankruptcies, no
claim for the difference in such amounts. Those
administrative costs are paid from customer
customers who have withdrawn more money than
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they deposited (including by way of receipt of
protect their interests if it is later determined that
dividends) will not have allowed claims.
they do indeed qualify as “customers.”
Who Should File
In order to aid the claims process, all claimants are
SIPA only protects “customers” of broker dealers. The Trustee explained that in the first instance he was guided by the SIPA statute’s definition of “customer” and the Second Circuit’s subsequent interpretations. As such, a “customer” within the meaning of SIPA is anyone who deposited cash with BMIS for the purpose of purchasing securities and who believed that securities were being purchased for his or her account. Each customer is entitled to $500,000 of SIPC
asked to provide as much information about their claim as they have, including a narrative explaining the claim and any available documentation. Customer claims will not be publicly available, unless the claimant disputes the Trustee’s determination of the claim or the Trustee otherwise becomes involved in litigation with the claimant. To date, the Trustee has received approximately 2,450 claims and expects to receive twice that number by the July 2 bar date.
protection. An individual may receive such
Review and Payment of Claims
protection for each of multiple accounts held in
The Trustee is seeking to apply a fair and consistent
different capacities. For example, if a person holds
approach across claims but recognized that each
an individual account, an IRA, a joint account and a
claim presents unique facts which will need to be
trust account, each such account might qualify for
considered in making determinations. According to
separate SIPC protection.
the Trustee, they have compiled customer records as
The Trustee repeatedly urged anyone who believes he or she might have a claim to file a claim by the bar date. In response to the question of whether customers in a feeder fund should file a claim, the Trustee explained that historically only those who receive statements from the brokerage are
far back as 1993 and are continuing to gather records from earlier periods. He has determined that those records accurately reflect the deposits and withdrawals. As such, in determining claims, the Trustee will recreate the customer account to the extent possible.
considered customers under SIPA. He cautioned,
The Trustee cautioned that it was likely to take
however, that this is a unique case and as the facts
much longer to issue determination letters for
concerning the operation of the feeder funds and
people who invested with Madoff over a long period.
their relationship to Madoff develop the question of
Persons who were in for a brief period recently
whether the customers of the funds should be
would probably receive their determinations faster.
treated as customers of BMIS will probably be litigated. If no claim has been filed, no recovery can be had even if the courts define customer to include the feeder funds. As a result, the Trustee reiterated that although there is no guarantee that claims by persons other than direct customers of BMIS will be allowed, all persons who believe they might be “customers” must file a claim by July 2 in order to
In considering the claims received to date, there are many policy considerations currently being discussed with SIPC and the SEC. The Trustee stated that they hoped to be in a position in very short order to begin issuing determination letters notifying customers of whether their claim is allowed and for how much. If a claim is disallowed, the letter will provide an explanation of the
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determination. If the claim is disallowed for any reason or the customer does not otherwise agree with the determination, the customer can oppose the determination in a court filing. The determination letter will include instructions for challenging a determination.
Claw Back Litigation The Trustee has made clear that as part of his duties to recover assets of the estate for purposes of distribution to customers, he will pursue the recovery of false profits paid out to customers through preference and fraudulent transfer (“Claw
If a claim is allowed, the claim will first be paid from
back”) litigation. He did not indicate whether he
advances from SIPC up to the $500,000 limit.
intended to go after the principal as well. The
Customers with remaining balances on their allowed
Trustee explained that because the entire operation
claims will then be paid on a pro rata basis from the
of BMIS was a fraud and no securities were ever
property recovered by the Trustee. Each customer’s
purchased, nobody earned any profits on their
pro rata recovery is as follows:
investments. Any profits that customers believed
Individual Customer’s Allowed Claim × (Total Customer Property Recovered by Trustee ÷ Total Amount of Allowed Claims)
they received were simply other customers’ money. The Trustee emphasized that his duty to pursue such fictitious profit payouts is one imposed by Congress,
It is important to note that the pro rata ratio is applied
which has determined that in such cases, all shortfalls
to the customer’s entire allowed claim, and not merely
must be ratably shared. Counsel stated that they would
to the remaining balance of the claim following the
go back as far as they could.
payment of the SIPC advance. In other words, the
Noting that much activity occurred in other
customer will receive its pro rata share of customer
countries, Counsel stated that they intended to
property up to the entire amount of its allowed
retain counsel in those jurisdictions and proceed as
claim. The Trustee gave the following example:
appropriate. In addition, they noted that they were
A customer has an $800,000 allowed claim.
working with regulators in other jurisdictions.
The customer will immediately receive $500,000
Both Counsel and the Trustee did, however, suggest
from the SIPC advance, leaving a $300,000 balance
that they would not pursue every single instance of
on the claim.
payment of fictitious profits. They will endeavor to
If, after recovering assets, the Trustee determines
make reasonable decisions based on the factors
that the applicable ratio of customer property to
available to them. For instance, pursuing a small
allowed claims is 50%, the customer would receive
investor with few profits might not make sense from
50% of the $800,000 or $400,000.
an economical or fairness perspective. An investor
However, because the total outstanding balance of the claim is only $300,000, the customer will receive only $300,000 (the balance of his entire claim). The remaining $100,000 will go back into the pot of customer property.
who was well informed and aware of “red flags” would present a different case. When asked whether they would seek to claw back funds redeemed by charitable institutions, Counsel responded that they had over 200 not-for-profit/charitable entities. They would consider each individually to understand whether the monies were spent on
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charitable endeavors. If the money was used for
and Madoff, all account activity and any other
charitable purposes they may not seek claw back.
factors which the Trustee deems appropriate. This entire process will take some time, as the Trustee
The Trustee will consider several factors in determining whether to pursue a claw back action against any particular individual, including, but not limited to, the amount of fictitious profits at issue, the time period during which any such payments
has to carefully review the facts of each case in making his determination. The Trustee indicated that he will bring a “certain degree of reasonableness and compassion” to the process.
took place, the relationship between the individual
This memorandum is intended only as a general discussion of these issues. It should not be regarded as legal advice. We would be pleased to provide additional details or advice about specific situations if desired. If you wish to receive more information on the topics covered in this memorandum, you may contact your regular Shearman & Sterling contact person or any of the following: Tammy P. Bieber New York +1.212.848.5333
[email protected]
Stephen Fishbein New York +1.212.848.4424
[email protected]
Laura S. Friedrich New York +1.212.848.7411
[email protected]
James L. Garrity Jr. New York +1.212.848.4879
[email protected]
Alan S. Goudiss New York +1.212.848.4906
[email protected]
Nathan J. Greene New York +1.212.848.4668
[email protected]
Heather Lamberg Kafele Washington, DC +1.202.508.8097
[email protected]
Steven F. Molo New York +1.212.848.7456
[email protected]
Brian H. Polovoy New York +1.212.848.4703
[email protected]
William J.F. Roll III New York +1.212.848.4260
[email protected]
Richard F. Schwed New York +1.212.848.5445
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George J. Wade New York +1.212.848.4190
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Henry Weisburg New York +1.212.848.4193
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