The Madoff Victim Cash Recovery Quest May Be Coming to a Close

(Bloomberg Businessweek) -- HSBC Holdings Plc, et al., Petitioners v. Irving H. Picard
Case #19-277

The Origin

Remember when Bernard Madoff acknowledged operating the biggest Ponzi scheme ever, bilking investors out of $17.5 billion? That was 11 years ago. Since then, Irving Picard, the trustee in the Madoff bankruptcy, has filed hundreds of lawsuits to recover money for Madoff victims. He’s clawed back $14.2 billion so far. But there’s one bucket of money he hasn’t been able to get at: about $3.2 billion held by foreign banks.

The Hearing

In 2012 dozens of these offshore institutions argued before U.S. District Judge Jed Rakoff that Picard had no business going after their money. Yes, the money had been transferred from feeder funds—investment vehicles run by Madoff’s friends and enablers that kept the money flowing into the scam. But that didn’t matter, they argued, because the section of the U.S. Bankruptcy Code that dealt with voiding transfers didn’t apply to transactions between foreign entities. In 2014, Rakoff ruled in their favor.

The Appeal

You know how they say the wheels of justice turn slowly? Has that ever been true in the Madoff bankruptcy! In February, seven years after that 2012 hearing, the U.S. Court of Appeals for the Second Circuit finally overturned Rakoff. The three-judge panel concluded that what mattered was that the original transfer, from Madoff to the feeder funds, originated in the U.S. If the subsequent transfer to the foreign banks couldn’t be clawed back, they wrote in their decision, it would essentially make fraudulent transfers legal.

The Finale

No surprise here: The banks appealed to the Supreme Court. A few weeks ago, Picard asked the court to reject their appeal. The court is expected to decide whether to take the case in early December. Whatever it decides, this will be the last big case for Picard—at least as far as the Madoff victims are concerned. In most Ponzi schemes, the trustee recovers 5% to 30% of the lost funds. Picard has recovered more than 80% so far; if the courts let him claw back the $3.2 billion from the foreign banks, he’ll be close to 100%.
 
• This has already been a big year for Picard: In July he reached a settlement with a couple of funds based in the British Virgin Islands to return $860 million of the $926.4 million they’d invested with Madoff. One of the funds, Kingate Management Ltd., later filed for bankruptcy to protect its ability to pay.
 
• An excellent way to get rich is to become a bankruptcy lawyer. As of September, the lawyers, trustees, and consultants (but mostly the lawyers) working on behalf of the Madoff victims have brought in almost $1.8 billion in fees. That’s almost $164 million per year since the clawback process began more than a decade ago.
 
Nocera is a business columnist for Bloomberg Opinion.

To contact the editor responsible for this story: Jillian Goodman at jgoodman74@bloomberg.net, Eric Gelman

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