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Supreme Court Declines Key Madoff Appeal, Bringing Good News and Bad News to Victims

Bruce Carton | June 27, 2012

This week, the U.S. Supreme Court denied certiorari in an appeal filed by  Madoff investors who were "net winners" in his Ponzi scheme. The appeal took aim at the methodology Madoff trustee Irving Picard decided upon to decide which victims' claims would be allowed and which would not.

In short, Picard determined that he would evaluate victims' claims based on the amount of money victims lost from their principal deposits -- and not how much they lost based on the fictitious "profits" shown on their account statements. The WSJ reports that Picard filed court papers arguing that 

relying on customers' last account statements would have been flawed because they "not only reflected securities transactions that could never have occurred, they reflected securities that the customers had not in fact paid for with real dollars."

The SEC and SIPC both filed court briefs supporting Picard's decision and methodology, the WSJ reports.

The fact that Picard's methodology will stand brings good news and bad news to Madoff victims. The good news is that for those victims who are not "net winners," the failure of this legal challenge means that the next payout to victims from the over $9 billion recovered by Picard will come sooner. “The Supreme Court of the United States found no issue worthy of review in the challenge to our net equity calculation formula, Picard stated following the Supreme Court's decision. "This settles the issue once and for all and allows us to seek approval for a second distribution of recovered funds to Madoff customers. With the Court's ruling in hand, we can now determine the amount of the distribution and file the motion for approval with the Bankruptcy Court within an expedited time frame.”

Stephen P. Harbeck, President and Chief Executive Officer of the Securities Investor Protection Corporation (SIPC), said the development was "excellent news for the hundreds of victims who have not received a return of all the funds they deposited with Madoff. These victims can now look forward to receiving a distribution in the near future. The SIPA Trustee and his team, who have been held back from distributing funds pending the outcome of this time-consuming legal challenge, can now move ahead with plans for a distribution.” To date, only $332.6 million of the $9.1 billion recovered has been distributed to victims.

The news is universally bad for "net winners," however.  As summarized by the Boston Herald, net winners do not qualify for the up to $500,000 in SIPC insurance, will not receive any of the $9.1 billion recovered by Picard, and, in some cases, are themselves being sued by SIPC for the “profits” they made (returns over their principal invested) through the Madoff scheme.