How do you value fraud?
When the Madoff ponzi scheme collapsed the claim was that there was $65 billion in losses. That was the total dollar value on the account statements given to investors. Of course, that number was fictional because there were not real assets behind those numbers.
The trustee overseeing the liquidation of the assets looked at the cash that came into Madoff and the cash that came out. The bankruptcy judge agreed. In a decision filed on Monday, Federal Bankruptcy Judge Burton R. Lifland ruled that losses should be defined as the difference between the cash paid into a Madoff account and the amount withdrawn before the fraud collapsed in mid-December 2008.
The Madoff trustee, Irving H. Picard, took the position that “the only verifiable amounts” reflected in the Madoff records are the differences between how much investors put into their accounts and how much they took out.
The result is that those investors who didn’t pull out their initial capital will get a greater percentage of their money out than those who took withdrawals from their accounts.
To put it another way, the people are getting the greatest percentage of money back are:
- Those who least need the money. Since they took less money out they presumably have other income or capital to support their needs.
- Those most trusting of Madoff. Since they trusted Madoff, they did not pull money out of their investment accounts. They rode those returns and let their fictional returns keep accumulating.
Those who took out more cash from Madoff than they put in were labeled the “net winners” and get nothing. Even worse, it looks like the “net winners” may have to give back some of their “winnings” to the bankruptcy estate to pay off the net losers.
Of course, the opposite ruling is just as bad since the early investors would be paid by later investors, effectively extending the Ponzi scheme.
The judge is taking the position that people should be put back to their position as if they had not invested with Madoff. In the end its going to bad for all the investors. It’s just a question of who feels the most pain.
Sources:
- Valuation Ruling in the Madoff Bankruptcy and SIPC Awards – hosted by JD Supra
- Madoff Judge Endorses Trustee’s Rule on Losses by Diana Henriques in the New York Times
- Judge’s Madoff Ruling Bars Recovery for Some Investors by Amir Efrati for the Wall Street Journal