Madoff Victims Line Up for a Partial Refund

A clearer picture is emerging of how much money might be available to pay back victims of the Bernard Madoff fraud. The pot is a big one, although nowhere near enough to repair the damage.
    
The pool of money begins with nearly $1 billion held by Madoff's company and potentially more than $100 million in personal assets that include luxury homes, cars and boats.
    
But it doesn't end there.
    
Several banks, hedge fund managers and others who led clients to Madoff may wind up paying huge settlements to resolve negligence lawsuits. Banco Santander, Spain's largest bank and one of the biggest losers in the scheme, has already offered 1.3 billion euros to defrauded customers.
    
Some U.S. investors will be able to receive up to $500,000 from an industry fund for people whose money has vanished in a brokerage failure. The fund has access to $3.1 billion.
    
Ironically, a handful of Madoff clients could theoretically end up doing better than if they had purchased legitimate stocks.
    
As of Friday, the Dow Jones Industrial average had lost 41 percent of its value in the past 12 months.
    
By comparison, a person who pulled $800,000 out of the market at this time last year and gave it to Madoff, then received $500,000 back from the Securities Investor Protection Corp., would be down only 38 percent.
    
The reality for many victims, though, is that they will be in a long line of investors likely to recoup only a fraction of what they lost.
    
As of this week, some 6,700 people have filed claims for a share of whatever is recovered. Thousands more are expected to apply by a July deadline. Many lost $1 million or more.
    
"Whether the losses are $30 billion or $60 billion, there is not enough money out there to satisfy all these victims,'' said Anthony Paccione, an attorney with the firm Katten Muchin Rosenman LLP in New York.
    
For the swindled, the promise that they may someday recover a few thousand dollars of their life savings is cold comfort at best.
    
"You gather up some money in an honest working way, and it's all gone,'' said Joanne Meerow, whose husband, Burt, invested the proceeds of the sale of his office equipment testing business in a hedge fund that, in turn, gave all its holdings to Madoff.
    
"We do not have very much of a hope at all of getting anything back,'' Burt Meerow said. "It is the death of your future. When you are 70 years old, you can't just go out and start over.''
    
Still, an army of lawyers is already out looking for money. They have found much so far, although each potential source of cash seems to come with a question mark.
    
Victims could recover substantial sums from the Internal Revenue Service by claiming their Madoff losses as a theft, a move that would entitle many to a refund on whatever taxes they paid in the last five years. Some estimates say those refunds could be worth billions.
    
Prosecutors are seizing as much as they can of Madoff's personal fortune, and have also begun demanding millions of dollars in payments from his relatives. Madoff's net worth, however, is unclear. Madoff claimed assets of around $123 million, not counting shares of his own company, which also did legitimate business on Wall Street but whose value is now uncertain.
    
The Securities Investor Protection Corp., which guarantees brokerage accounts somewhat like the Federal Deposit Insurance Corp. guarantees bank deposits, will have strict limits on how many people it can help and is unlikely to spend the $3.1 billion it could tap for victims.
    
Under fund rules, payouts are limited to $500,000 per account, and SIPC probably won't cover those who invested with Madoff indirectly through a hedge fund. It could spend as much as $2.4 billion, if each of Madoff's 4,800 direct investors qualify for the maximum payment.
    
The simplest pool of refund dollars may come from assets held by Madoff's collapsed company. The court-appointed trustee overseeing its liquidation said that he has so far found about $943 million that can be distributed to customers.
    
That total could grow, however, once the trustee begins the task of trying to roll back the Ponzi scheme and return all the false profits that Madoff had handed out to investors lucky enough to withdraw money before the scam collapsed.
    
The Madoff trustee, Irving Picard, has said he plans to initiate several so-called "clawback'' lawsuits to recover that money.
    
How much cash that effort will generate is unknown, but it could also amount to billions of dollars. The courts have had a mixed record trying to untangle other Ponzi schemes. In some lucky instances, investors have gotten back a majority of what they put in. In others, they've received pennies on the dollar. The amount could depend on how hard Madoff investors resist demands that they return ill-gotten gains.
    
Picard has said that any assets recovered by the trustee will be divided up among the victims on a prorata basis, meaning everyone will get back the same percentage of their principal investment.
    
No one, he said, will be entitled to claim a profit.
    
Unlike a bankruptcy proceeding, there won't be a pecking order of creditors that will entitle some to receive their money before others, but the rules for the SIPC fund will create many instances where some investors get a big chunk of money back, while others -- namely those who invested through large hedge funds -- will get relatively little.
    
So what percentage of the total losses might be recovered in the end?
    
It's hard to say, if only because investigators still don't know exactly how much investors gave to Madoff in the first place.
    
Prosecutors said that not long before his arrest, Madoff sent clients statements saying they had $64.8 billion in their accounts.
    
That figure, though, was fiction. Madoff had lied to investors for decades about how much their investments were worth. The amount of real money at stake is still being tallied.