This post contains my notes from the webinar: Madoff Litigation: Can the Lost Billions be Recovered? How? The Webinar was sponsored by NERA Economic Consulting and produced by The Securities Docket. The slides are available on Securities Docket.com: Materials from Madoff Litigation Webcast.
- Brad Friedman of Milberg LLP
- Gerald Silk of Bernstein Litowitz Berger & Grossmann LLP
- Dr. Fred Dunbar of NERA Consulting
Brad divides the world into those invested direftly through a Madoff account and those that invested through a feed fund or a fund of funds. The two groups of investors have different causes of actions and different approachs. Brad is representing both but focused his piece on direct investors.
The direct investors are in the worst position. Their biggest hope of recovery is from the SIPC. The limit is $500,000 for securities. The SIPC may also take the position that the limit is $100,000 (the cash limit) since Madoff apparently never invested in securities. Recovery is also limited to the dollars put in less the cash returned over time. Of course the direct investors will also have claims against the Madoff bankruptcy estate and should file a claim.
In an audience vote, 70% though Madoff should not be free on bail.
Gerald focuses on the issues arising from indirect Madoff investors. The feeder funds offer a deep pocket for recovery. In the case of a limited partnership structure, they will need to prove gross negligence or willful misconduct. Recovery will be governed by the partnership agreement and related documents. The other problem is that the general partner may be able to use the assets of the limited partnership to defend and indemnify themselves. You end up suing yourself.
Fred pointed out that there are lots of “losses”, but also lots of “damages” and probably very little “recovery.” Among the factors are (1) choice of law, (2) allocation among the parties based on conduct and causation and (3) time at which damages are estimated. The starting point for damages is going to be the differences between the reported value on the account statement and the actual value of the securities in the account.
Losses Due to Fraudulent Reported Value = Loss on Subscriptions – Gain on Redemptions (similar to 10b-5 damage valuations)
Fred cites the case of Goldstein v. SEC (DC Cir. 2006):
If the investors are owed a fiduciary duty and the entityis also owed a fiduciary duty, then the adviser will inevitablyface conflicts of interest. Consider an investment adviser to ahedge fund that is about to go bankrupt. His advice to the fundwill likely include any and all measures to remain solvent. Hisadvice to an investor in the fund, however, would likely be tosell. …It simply cannot be the case that investment advisers are theservants of two masters in this way.
It was a great panel. Thanks to the panelists, sponsors and publishers of the webcast.