Madoff trustee wins new ruling over payouts

[January 15, 2016]  By Jonathan Stempel

(Reuters) - A federal judge said the trustee liquidating Bernard Madoff's firm need not consider transfers of fictitious profits between customer accounts when considering how much the recipients should recover over the swindler's Ponzi scheme.

Thursday's decision by U.S. District Judge Paul Engelmayer in Manhattan endorsed trustee Irving Picard's methodology in valuing transfers between accounts at the former Bernard L. Madoff Investment Securities LLC.

Picard sought to use a variation of his "net equity" method previously endorsed by federal courts and ignore fictitious profits appearing on bogus account statements prior to Madoff's December 2008 arrest when determining customer claims.

Under this variation, if a customer had $5 million on his statement, comprising $2 million of equity and $3 million of fictitious profit, and tried to transfer the full sum to another customer, Picard would credit the recipient for only $2 million.

Dozens of recipients objected and filed four appeals.

But in a 53-page decision, Engelmayer said U.S. Bankruptcy Judge Stuart Bernstein in December 2014 correctly rejected their claims, even if they honestly believed the transfers were real and organized their financial and tax affairs accordingly.

"Any Madoff customer who held a BLMIS account when Madoff's scheme came to light and was unable to withdraw investment holdings on which he or she had long relied was the victim of an epic unfairness," Engelmayer wrote.

But to help ensure the repayment of principal to "net losers," or customers who put more money into Madoff's firm than they took out, Picard's method was "fairer" and "superior as a matter of law," the judge added.

Picard has recouped roughly $10.94 billion for Madoff victims, or more than three-fifths of the roughly $17.5 billion of principal he has estimated they lost.

Madoff is serving a 150-year prison term.

The cases in the U.S. District Court, Southern District of New York, are Diana Melton Trust vs Picard, No. 15-01151; Zraick v. Picard, No. 15-01195; Blecker et al v. Picard, No. 15-01236; and Sagor v. Picard, No. 15-01263.

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