June 29, 2009 6:22 PM

Madoff Victims, Lawyer Lash Out at Government, Trustee

Posted by Brian Baxter

UPDATE: 5:45 p.m., June 30. The New York Times's Joe Nocera has a post on his Executive Suite blog taking Madoff investors to task for expecting to be made whole. In a Ponzi scheme, Nocera writes, not everyone can ever be made whole.

After a federal judge sentenced Bernard Madoff to 150 years in prison Monday, several Madoff victims and their lawyer gathered in Foley Square to protest the actions of Madoff trustee Irving Picard of Baker & Hostetler, the SEC, and SIPC, a federally mandated program that helps securities investors recover funds from collapsed broker-dealers.

Under the blistering midday sun, the signs held by victims made clear the object of their ire. "SIPC is a Scam," read one placard, "SEC = Sorry. Excuse. Comm.," said another, and "Madoff stole it, SEC ignored it, IRS kept it," screamed a third.

A spokesman for New York Democratic congressman Gary Ackerman read a statement criticizing the SEC and called on SIPC to provide the maximum restitution possible for victims of Madoff's estimated $50 billion fraud. "It's absolutely unconscionable for the government to turn its back on Madoff victims," the spokesman said.

But turning their backs is what several speakers, including Phillips Nizer litigation partner Helen Chaitman, claim the government is doing.

The Madoff scam has wrought "incalculable devastation" for many Americans, Chaitman said to a throng of reporters, victims, and onlookers.

"The SEC is backing the securities industry over Madoff victims," said Chaitman, a Madoff victim herself.

Chaitman later told The Am Law Daily that she represents 97 other Madoff victims that are suing SIPC and trustee Picard over the valuations placed on their Madoff-related losses. (Click here for a New York Law Journal story on the litigation.)

Picard, who was approved as trustee in December under the Securities Investor Protection Act of 1970, has reportedly served as trustee in more brokerage firm liquidations than anyone else in the U.S.

The Wall Street Journal recently quoted a Proskauer Rose partner saying that getting Picard to leave New Jersey firm Gibbons for Baker & Hostetler last year was "like a walk-off, grand-slam home run in the seventh game of the World Series" in raising the profile of Picard's new firm.

But Chaitman and her fellow Madoff victims don't think so highly of the trustee. Chaitman says she's tried to get a meeting with Picard for months. "He refuses to speak with me," she says. "I even asked if he had a paralegal, and I couldn't even get that."

At issue is Picard's and SIPC's interpretation of "net equity," or the difference in the total amount of money invested with Madoff and that withdrawn before the collapse of Madoff's firm. Chaitman said SIPC defines the amounts available to Madoff victims on a "money-in, money-out" basis. Since SIPC is a federally mandated nonprofit that is funded by the broker-dealers that it regulates, Chaitman says SIPC has an interest in keeping payouts to victims at a minimum.

Using Chaitman's reasoning as as example, if someone invested $500,000 with Madoff 20 years ago and watched that balance appreciate to $1.5 million, they would be eligible for the maximum $500,000 in insurance available under SIPC.

If they initially invested more than $500,000, say $1 million, an investor would recoup $500,000 through SIPC insurance and then file a claim to try to recoup the rest of their investment from the pool of money the trustee has recovered. (Picard has recovered about $1.2 billion for victims so far, although he's not allowing claims on "fictitious profits.")

The problem is many elderly Madoff investors have made withdrawals from their Madoff accounts to help pay medical expenses and fund their retirements, Chaitman says. Under Picard and SIPC's compensation model, those individuals might have a net equity of $0--the same money out as they initially put in--and thus have no SIPC claim at all.

If illicit profits allowed those investors to take out more than their initial investment, they could technically have a "negative net equity," explained one Madoff victim, a Boca Raton realtor named Stephanie Halio, who attended the rally. That makes them susceptible to clawback suits brought by Picard if they've withdrawn those funds in the last six years. (Adding insult to injury, Halio said, is that the IRS taxed victims on fictitious gains, even as it's now allowing them certain tax deductions.)

Those at the rally weren't the only ones railing against Madoff.

As we reported earlier today, Madoff's wife, Ruth, released a statement criticizing her husband's criminal conduct. Ruth Madoff's lawyer, Peter Chavkin of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, released this statement.

But Madoff victims weren't interested in apologies.

"You can't commit a crime repeatedly over decades and when you're caught, then say you're sorry," said  Maureen Ebel, 61, who lost her life savings to Madoff. "Unfortunately when the Madoff scam ended, the SIPC scam began."

A Wall Street executive turned author at the rally, Norb Vonnegut, a distant relative of the late Kurt Vonnegut with a book out in September borrowing elements of the Madoff affair, noted one irony in the madness.

"Do you know what the name of Charles Ponzi's business was?" he asked. "The Securities Exchange Company."

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