A decade has passed since the discovery of the Madoff Ponzi scheme, the largest financial fraud in history. Understandably, the collapse was met with heartbreak, shock, and disbelief. But just as the realizations of financial loss were taking hold, a professional recovery process was born.

The failure of the Madoff brokerage meant that, simultaneous with the FBI investigations, a special law, the Securities Investor Protection Act, was triggered. This Act gave the Securities Investor Protection Corporation (SIPC) oversight of the case, full responsibility to pay for the recovery effort, and cleared the way for a Trustee, who would have the mandate to search for and use the legal system to recover funds. The Madoff matter became the largest case in the history of SIPC and we were asked to serve as its stewards.

In the early days of the Madoff Recovery Initiative, we relied on our experience, having worked on Ponzi scheme cases in the past. Even though this was the biggest fraud of its kind ever, our goal was still the same: to recover as much as possible for investors who had not recovered their principal. But given the typical recoveries reached in past Ponzi scheme cases, we expected the recovery to be just a few cents on the dollar as we began our work.

With a team of lawyers, experts, and forensic accountants, and the support of SIPC, we began to follow the money. Reconstructing a more than 30-year fraud was a massive undertaking. But the thorough work of our team of professionals allowed us to file more than 1,000 lawsuits within two years, as mandated by law, seeking the return of those monies.

As we were assembling the cases, we also moved quickly on the claims front. Investors were hurt, families were crippled financially, and charities had been destroyed by Madoff’s deceit. Together with SIPC, in the spring of 2009 we began to speedily distribute up to the maximum $500,000 advance to all who qualified. Even if the claimant disputed what was owed, we did not hold up the initial relief. We also established early on a Hardship Program, which moved those most desperately in need to the front of the line to receive a SIPC advance. Later, the Hardship Program would allow us to consider the special circumstances of hundreds of victims and spare them litigation and the need to repay ill-gotten Madoff profits.

And one by one, as a result of settled lawsuits and negotiations, the recoveries started to come in. We reached deep into our toolkits to engineer agreements with financial institutions, feeder funds, and other sophisticated investors.

By late January 2009, the Trustee had recovered more than $865 million from several banks and other financial institutions holding BLMIS assets. By late 2010, we had recovered more than $7.3 billion. And 10 years from the discovery of the Ponzi scheme, the Madoff Recovery Initiative had reached $13.3 billion in recovered funds. The Madoff recovery team has set new records for the recovery and return of stolen funds, both in terms of percentage and dollar amounts. Every single penny that we collect goes back into the hands of BLMIS customers. The Madoff Recovery Initiative is the most successful Ponzi recovery in history.

Distributions from our Customer Fund began in 2011, following important court victories. To date, in addition to SIPC advances, we’ve made ten distributions – at least one each year -- putting more than $12.3 billion back in the pockets of swindled customers of BLMIS. With our tenth distribution, all allowed customer claims up to approximately $1.490 million will be paid in full, and the remaining investors will have received more than 66 percent of each allowed claim amount. This level of success was unthinkable during the first months of the recovery initiative.

Over the past 10 years, we have also changed the face of liquidation legal practice and set new precedents that will benefit victims of future financial frauds. The most significant of these legal victories is supporting the use of net equity to fairly determine the claim amounts of all investors. We believe that using the net equity method is the only way to ensure that the net losers – those who had not withdrawn more than they deposited – were treated equitably. Our methodology survived numerous legal challenges, all the way to the Supreme Court.

A related issue was whether customers are entitled to time-based damages, which would benefit customers who were invested the longest at the expense of newer customers. We maintained that any time-based damages could not come into play until all customers with approved claims have recovered 100 percent of their principal. Again, we prevailed on this important question.

Transparency has been another hallmark of our efforts. By creating the Madoff Recovery Initiative website, madofftrustee.com, we established a home for an unprecedented amount of information, including news about the case, questions, answers, and a database of more than 8,900 legal filings.

Unravelling the Madoff Ponzi scheme and seeking recoveries around the globe has been the challenge of a lifetime, and we are proud to serve as the stewards of this process. It has been a long road, and we are not done yet. Our approach has always been to leave no stone unturned. Every day, we remain mindful of why we are here, who we are working for, and what our goals are. Our partnership with SIPC on the Madoff Recovery Initiative is meant to help restore faith in the markets, and we hope that on that point we have succeeded. As always, we invite you to check back here often, as we will continue to provide the most up-to-date information possible.

 A Message from the SIPA Trustee’s Chief Counsel, David J. Sheehan

August 30, 2017 – The overriding goal of this liquidation is to return principal lost in the Madoff Ponzi fraud to its rightful owners in the timeliest manner possible. The rightful owners include both “direct” Madoff customers (those who had accounts with the Madoff firm) and “indirect” customers (those who invested in BLMIS through third parties).

Over the past eight years, the SIPA Trustee and his global legal teams have recovered or reached agreements to recover more than $12.0 billion, and more than $10.2 billion has been distributed to victims of the Madoff Ponzi scheme.

The indirect investors represent a significant group of Madoff victims, with approximately 69 percent of the losses associated with feeder fund accounts. Getting recoveries returned to indirect Madoff investors is much more complex than returns to the direct investors. We have had a great deal of success, nevertheless, in safeguarding the interests of indirect Madoff investors and restoring stolen funds to them. In this letter, I’d like to update you on our approach and recent activities in that area.

In the beginning of the case, we moved as quickly as possible to evaluate more than 16,000 claims filed with the SIPA Trustee. The losses incurred by Madoff customers with BLMIS accounts in their own names were relatively straightforward to determine because the SIPA Trustee and his team had access to BLMIS’s books and records showing their investment histories with BLMIS.

Losses incurred by those who invested indirectly in BLMIS – in vehicles such as feeder funds – posed more difficulties. This is because the information regarding identity, the amounts invested, and whether that investor is a “net loser” or “net winner” was maintained by the feeder fund (or other investment entity), not the SIPA Trustee. In other words, the SIPA Trustee could not know who those investors are or how much they have lost.

That limitation does not mean that indirect investors are out of luck. Our court-approved approach has been to consider the feeder fund or other third party as the customer of record, while creating safeguards for the indirect investors to ensure that they share in the distributions to the fullest extent possible. Specifically, as the feeder funds and other third parties settle their litigations with the SIPA Trustee and begin receiving distributions, the settlement agreements provide that they expedite reimbursements to their investors. In some cases, the terms of the settlement preclude managers of the funds from participating in recoveries to ensure that the maximum amount is returned to the investors.

Is our approach working? Yes, and a recent court ruling is the latest example.

Tremont Group Holdings, Inc. and its affiliates (“Tremont”) had more than a dozen feeder funds with five BLMIS accounts. The SIPA Trustee settled with Tremont in September 2011, allowing its claim for $3 billion. To date, Tremont has received $1.8 billion from the SIPA Trustee.

Tremont was sued by its investors in a federal class action. In 2015, a district court approved a Plan of Allocation, which distinguished between the “net loser” and “net winner” feeder funds of Tremont. Each fund’s investors were to receive a pro rata share of the recoveries according to the investors’ net equity (i.e., amount lost) in that fund. The investors in the “net loser” funds received distributions. Investors in the “net winner” funds, by contrast, contributed to the settlement.

Investors in the “net winner” funds appealed this arrangement, but failed to overturn the Plan of Allocation. The Second Circuit, in affirming the district court’s Plan of Allocation, noted that “the [Plan of Allocation] adopts the net equity principle of allocation that this Court has previously endorsed with respect to Madoff’s Ponzi scheme. This principle holds that, because net winners were given money stolen from net losers, only net losers have an equitable right to recovery.” This ruling paves the way for Tremont’s indirect investors to share in the SIPA Trustee’s distributions.

As the Tremont settlement demonstrates, even though indirect investors are not “customers” according to strict legal definition, they are still Madoff victims and still benefit from the SIPA Trustee’s distributions.

Other examples include the Ariel Fund Limited and Gabriel Capital L.P., which received initial distributions of approximately $179.5 million in 2015 shortly after settling with the SIPA Trustee, which were distributed to their investors. These funds have also received subsequent distributions that, in turn, were restored to their investors. These are just but a few examples of the SIPA Trustee’s commitment to all Madoff victims, be they among the “direct” customers in BLMIS or the “indirect” investors who invested with Madoff through third parties.

Fairness to all remains our goal.

David J. Sheehan
August 30, 2017

Indirect Investors Seeing Strong Recoveries from SIPA Trustee’s Work

 A Message from the SIPA Trustee’s Chief Counsel, David J. Sheehan

March 6, 2017 – Just a few months ago – within days of the eighth anniversary of the revelation that Bernard Madoff’s vaunted investment prowess was, in fact, the largest Ponzi scheme in history – we announced our plans for the eighth interim distribution of recovered funds to the victims of the Madoff fraud.

The distribution was approved by the court and commenced in early February. With this distribution, the aggregate amount returned to eligible BLMIS customers now totals approximately $9.72 billion. When combined with the prior seven distributions, in aggregate, 60.098 percent of each customer’s allowed claim amount will be paid, unless that claim has been fully satisfied.

When we first began work on the Madoff Recovery Initiative eight years ago, it was widely expected that we would recover only a few pennies on every lost dollar. I was among those who held that expectation.

I vividly recall our second day on the job, our first visit to the BLMIS headquarters in the Lipstick Building on Third Avenue. Irving and I, and two other BakerHostetler attorneys, entered the chaos that was left behind after Madoff's arrest a week before. We were in a BLMIS conference room on the 17th floor when a FINRA examiner told us that there were virtually no securities holdings matching what the aggregate customer statements reported, that there was only about $150 million in the cash accounts.

That was when Irving and I had to stop and take a few breaths, realizing that this was going to be a massive Ponzi scheme recovery. It still took a while to really understand the true magnitude, but that was our first horrifying glimpse of what was on the horizon.

We quickly began to assess the situation and then started to understand what type of scenario was playing out at BLMIS. Needless to say, it was shocking.

It took a year just to work through the claims process, to determine that the losses of investors who ultimately filed claims totaled approximately $17.5 billion, representing the amount of principal lost by the allowed claimants who put more money into BLMIS than they withdrew.

Determining the amount of the actual losses was just the first step. As we continued our work unwinding and reconstructing the fraud, the greater challenge came in identifying the individuals and entities holding other people’s money, and moving swiftly and aggressively to recover those funds and return them to their rightful owners. We were operating in uncharted territory; no SIPA trustee had ever undertaken a recovery of this magnitude. Almost a year later, when Irving and I met with Morley Safer of “60 Minutes” in the fall of 2009, we still had a very conservative expectation that we would bring back only pennies on the dollar for victims.

Our teams apparently didn’t watch that particular episode of “60 Minutes.” In spite of Irving’s and my initial conservative views on the potential of the recovery initiative, our teams and their efforts exceeded expectations on every front. From the initial drive to file the essential litigation – within a tight, two-year deadline – that would lead to significant recoveries to highly successful settlement negotiations to the creation of groundbreaking forensic methods, data analysis and evidence management tools, our teams have set new standards for the legal profession in fraud recovery and restitution practice. Our recoveries now total more than $11.576 billion. We have recovered more than any other similar effort, and we are not done yet.

The result to date is tremendously gratifying to all the members of the recovery team: more than 200 BakerHostetler attorneys, as well as forensic accountants, experts, foreign and special counsel, and other professionals. I would like to take this opportunity to thank each and every member of this team. Yes, this type of work is our chosen career, but I can tell you that among our team members, there is a sense of mission that goes beyond “another day at the office.” We know that people were really hurt here.

I’d also like to thank the Securities Investor Protection Corporation. SIPC is the securities industry-funded organization that makes this entire recovery effort possible. Not only has SIPC funded the entire Madoff Recovery Initiative through advances, they have also advanced more than $839.9 million to BLMIS customers with allowed claims to speed some relief to them while Irving, the team and I do our jobs. Thanks to SIPC’s support, every dollar recovered will ultimately be restored to the victims.

Our sense of mission remains strong and compelling. Our ongoing goal is to focus on recoveries and bring back 100 percent of that lost principal.

Will we reach that goal? Our expectations for the ultimate recovery evolve. Even now, eight years later, the landscape continues to change, and as the courts make further determinations on critical issues, the case changes radically from time to time. However, we are gratified that many of Madoff’s customers with allowed claims have gotten back far more of their lost principal than they ever expected.

We will continue our efforts to meet our goal, no question. We also hope our work will help others avoid a similar tragedy.

David J. Sheehan
March 6, 2017

Madoff Recovery Initiative’s Distributions Exceed All Prior Ponzi Recovery Efforts

 A Message from the SIPA Trustee’s Chief Counsel, David J. Sheehan

Update: On March 17, 2015, a petition for a writ of certiorari was filed with the Supreme Court of the United States on behalf of the SIPA Trustee by his legal team, including Thomas C. Goldstein of Goldstein & Russell and Chief Counsel David J. Sheehan of BakerHostetler. The petition seeks a review of the December 8, 2014 Second Circuit decision regarding the “safe harbor/stockbroker” defense which not only affects the look-back period for the SIPA Trustee’s recovery claims for fictitious profits and principal, but also his ability to recover preferential transfers, as discussed in this letter. The Second Circuit decision currently bars the SIPA Trustee from recovering and distributing almost $2 billion to the victims of Madoff’s Ponzi scheme and calls into question an additional $2 billion of potential recoveries and distributions. A link to a copy of the writ of certiorari filing can be found here.

On June 22, 2015, the Supreme Court denied the SIPA Trustee’s petition to review the December 8, 2014 Second Circuit decision regarding the “safe harbor/stockbroker” defense, letting the Second Circuit decision stand. In a statement, the SIPA Trustee noted that approximately $5 billion of potential recoveries still remain and he and his Counsel will continue to pursue these amounts in the Bankruptcy Court.

March 12, 2015 – The SIPA Trustee reached several agreements in late 2014 – including with feeder funds Herald, Primeo, and Senator – which added significant amounts to the BLMIS Customer Fund and resulted in a fifth interim distribution of recovered funds to the victims of the Madoff fraud. The past twelve months have been among our most active periods and the coming year already promises to be equally active, with the SIPA Trustee’s team of professionals working diligently on a number of fronts, in and out of courtrooms, using all the legal tools at our disposal.

Through it all, our primary goal remains the same: to recover the maximum amount possible for the benefit of Bernard L. Madoff Investment Securities LLC (BLMIS) customers with allowed claims.

The SIPA Trustee has made significant progress toward that goal, recovering more than $10.5 billion to date. We understand that after more than six years of negotiations and legal actions around the globe, it’s logical to ask: How much more can be recovered? When will those recoveries be fully distributed? To reach our goal of returning 100 percent of principal losses by those customers who filed claims, at least $7 billion in principal remains to be recovered. Where will that money come from?

The bulk of the remaining principal losses can only be recovered through either litigation or the negotiation of settlements in the more than 700 legal actions that remain outstanding in the Madoff Recovery Initiative. These cases can be divided into two broad categories: cases in which the SIPA Trustee is seeking to recover only fictitious profits and actions in which the SIPA Trustee is seeking to recover fictitious profits and principal invested.

Current law permits the SIPA Trustee to recover fictitious profits – net amounts withdrawn from BLMIS in excess of principal invested – for the two-year period preceding the liquidation, from December 2006 to December 2008. Fictitious profits are comprised of the principal investments of other customers, and the SIPA Trustee has a responsibility to recover these funds, place them in the Customer Fund, and distribute the recoveries to eligible customers of BLMIS who have not yet recovered the initial principal they entrusted to Madoff. The current two-year total sought by the SIPA Trustee under this category is approximately $1.6 billion.

There are also cases where the SIPA Trustee alleges that BLMIS customers knew or should have known of fraud at BLMIS. These cases involve feeder funds and other sophisticated investors who claimed to have conducted due diligence on BLMIS. Current law permits the SIPA Trustee, in these cases, to pursue principal deposited in BLMIS for the two years prior to the liquidation in addition to fictitious profits. For these cases, the SIPA Trustee is seeking approximately $3.7 billion.

The SIPA Trustee is also pursuing appeals of certain lower court decisions that, once resolved, may permit the SIPA Trustee to seek larger recoveries or to return funds currently held in reserve to BLMIS customers with allowed claims.

One prominent issue currently under consideration for appeal to the United State Supreme Court is the applicability of the securities “safe harbor,” which determines the look-back period for the SIPA Trustee’s recovery claims for fictitious profits and principal and his ability to recover preferential transfers. In this appeal, the SIPA Trustee seeks to apply New York State law, which extends the look-back period for his recovery claims from two years to six years. If the Supreme Court agrees that the securities safe harbor does not apply, the SIPA Trustee’s litigation seeking an additional $4.3 billion for the Customer Fund will proceed.

Currently, not all recovered funds are eligible for distribution because reserves must be maintained for issues on appeals or in pending litigation. Nearly $1.5 billion of recovered money has been held in reserve – for years – due to an appeal in which certain BLMIS customers argued that they are entitled to receive interest as part of their net equity claims. The Second Circuit recently reaffirmed that BLMIS customers are not entitled to such “time-based damages.” The SIPA Trustee will file an application to distribute these funds as soon as possible and hopes that the appellants will refrain from filing a petition for certiorari with the Supreme Court so that distributions may proceed promptly.

In addition to the amounts recovered, which benefit BLMIS customers with allowed claims, another way in which the SIPA Trustee’s work benefits those customers is through negotiations on reductions in the customer claims asserted against the estate as part of the settlement process. In those cases, a claim is reduced or eliminated and, as a result, the remaining BLMIS allowed claimants receive a larger share of the Customer Fund. Settlements of this type have already had a substantial impact on the amount of funds available to Madoff victims.

While much has been accomplished, much remains to be done in the Madoff Recovery Initiative. Sometimes our work makes the headlines, but more often than not, the SIPA Trustee and his teams work tirelessly behind the scenes and in the courtrooms. Our top priorities are the return of customer property to BLMIS customers and the efficient administration of the case.

And every step along the way, both the SIPA Trustee and I continue to take seriously our ethical and legal obligations to keep the public informed. We hope that this letter is one more way of doing that.

Next Steps in the Madoff Recovery Initiative

 A Message from the SIPA Trustee’s Chief Counsel, David J. Sheehan

November 27, 2013 - Recently, the Special Master of the Department of Justice’s Madoff Victim Fund (MVF), Richard C. Breeden, announced his approach to the distribution of forfeited monies to certain victims of Madoff’s Ponzi scheme. The MVF currently holds approximately $2.35 billion of forfeitures that have been obtained by the United States Attorney's Office for the Southern District of New York in cases related to the Ponzi scheme operated through Bernard L. Madoff Investment Securities LLC (BLMIS).

The MVF is separate from the $9.508 billion that has been recovered to date by the Securities Investor Protection Act (SIPA) Trustee Irving Picard. Because the liquidation of BLMIS is a SIPA liquidation, the SIPA Trustee’s approach to the distribution of recovered monies is governed by the Securities Investor Protection Act and the Bankruptcy Code.

To date, the SIPA Trustee has distributed approximately 42.86 percent from the BLMIS Customer Fund, for a total of $4.833 billion returned to BLMIS customers with allowed claims. This is in addition to the approximately $811 million in cash advances SIPC has committed to speed financial relief to BLMIS customers with allowed claims. Further distributions will occur upon the resolution of certain pending legal disputes as well as upon the resolution of the SIPA Trustee’s lawsuits. Since the start of the claims process in January 2009, the SIPA Trustee and the Securities Investor Protection Corporation (SIPC) have collaborated to return recoveries to BLMIS customers with allowed claims as quickly as possible, without one penny of associated costs coming out of these resources.

As outlined by Mr. Breeden, the Special Master’s distribution approach differs in some ways from the approach mandated by SIPA, and these differences have raised a number of questions. In this letter, we will address questions surrounding distributions in the SIPA liquidation of BLMIS to “indirect” investors, a large group of individuals and entities who invested in “feeder funds,” which in turn funneled money to BLMIS. We hope the following brings clarity to this matter and the extraordinary steps the SIPA Trustee is taking to ensure recoveries are distributed to indirect investors in this unprecedented liquidation.

At the outset, we want to emphasize that the end goal of both the Special Master’s and the SIPA Trustee’s distributions is the same: to return principal lost in the fraud, as calculated by the net investment method, to its rightful owners in the most timely and efficient manner possible.

Based on reports regarding how the MVF will be administered, the Special Master intends to distribute recoveries based on net losses, or cash in versus cash out, both to those who invested directly in BLMIS and also to those who invested indirectly, through vehicles such as feeder funds, investment partnerships or family trusts. The Special Master does not expect to distribute recoveries to the feeder funds or other vehicles of the indirect investors; the only way a feeder fund is eligible to receive a payment from the MVF is if it invested its own money in BLMIS.

The Special Master correctly notes that this is different from the method used in the BLMIS liquidation. Basing his approach on SIPA, the SIPA Trustee makes distributions to allowed claimants who were actual customers of BLMIS – who had entrusted principal deposits with BLMIS – as of the December 11, 2008 filing date for the SIPA proceeding. This approach was affirmed by the Second Circuit Court of Appeals.

However, this does not mean that the individual, indirect investors in their respective feeder funds do not benefit from the SIPA Trustee’s distributions. In fact, in situations where the SIPA Trustee has approved a feeder fund’s claims, he has taken extensive steps to ensure that the money received by the feeder fund is distributed to its investors.

For example, the SIPA Trustee approved the claims of certain of the Tremont-managed funds (Tremont) in the approximate amount of $2.9 billion, after Tremont settled with the SIPA Trustee. And to date, the SIPA Trustee has distributed from the BLMIS Customer Fund to Tremont 42.86 percent of their allowed claims, totaling more than $1.2 billion.

(Due to a class action suit filed on behalf of Tremont investors, the approximately $1.2 billion from the BLMIS Customer Fund went to an escrow agent. Ultimately the distributions of the funds will be overseen by United States District Court Judge Griesa as part of the class action. The class action settlement is currently under review by the Second Circuit Court of Appeals.)

Once the class action settlement is resolved, the individual investors in Tremont will receive their shares of the $1.2 billion distribution from the SIPA Trustee. In addition, the SIPA Trustee structured the settlement with Tremont so that each time an additional BLMIS Customer Fund distribution is made, Tremont’s pro rata share of the distribution will go to Tremont’s individual investors pursuant to Judge Griesa’s orders.

Moreover, to ensure that Tremont investors receive the maximum benefit from the SIPA Trustee’s recovery efforts, the settlement agreement with Tremont specifically provides that none of the SIPA Trustee’s distributions can be paid to Tremont management for any purpose. This model has been and will be followed in future settlements with other feeder funds.

The SIPA Trustee’s approach is the approved avenue under SIPA, which has enabled the unprecedented recoveries and distributions in the BLMIS liquidation to date. BLMIS did not maintain – nor would it have any reason to maintain – records of either the identity of investors in various BLMIS feeder funds or, more importantly, the amounts invested by each feeder fund investor. Those records are likely maintained by the feeder funds, with which the investors have a legal relationship, and may show the identity of the customers and the amounts they are owed on a cash in-cash out basis.

The settlement with Tremont is just one example of the many nuanced and varied recovery and settlement agreements the SIPA Trustee has negotiated that involve indirect investors. Other instances have included small or family investment groups, LLCs and many others. Each situation is different. The SIPA Trustee evaluates the unique circumstances of each case and structures agreements to ensure that recoveries are passed through to the rightful owners appropriately.

Though the approaches by the SIPA Trustee and the Special Master may differ, the ultimate goal is the same: to return stolen monies to their rightful owners as quickly as possible. We hope this posting clarifies the differences between the distribution processes and we will provide further clarifications if the need arises.

Two Approaches, Shared Goals

 A Message from the SIPA Trustee’s Chief Counsel, David J. Sheehan

November 7, 2012- A Ponzi scheme the size and duration of Bernard Madoff’s was only possible if he went global. The magnitude of his financial fraud still holds the world record, with approximately $17.5 billion in losses. Four years of investigation has revealed that Madoff’s Ponzi scheme is unprecedented in its global reach – our work reconstructing the fraud has taken us into more than 30 jurisdictions to date.

Reports have focused largely on the Madoff liquidation here in the United States, but from the beginning, we have been tracing the funds that flowed through Madoff’s Ponzi scheme throughout the world. Madoff money has moved through scores of jurisdictions, including Kuwait, Monaco, Panama, Singapore, South Korea, Taiwan, the Netherlands, and the United Arab Emirates. The Securities Investor Protection Act (SIPA) Trustee is actively involved in litigations, investigations and proceedings in France, Liechtenstein, Luxembourg, Austria, the United Kingdom, Spain, Gibraltar, and Israel. We are also pursuing stolen funds and chasing customer money throughout the Caribbean, from the British Virgin Islands to Bermuda and the Cayman Islands. The liquidation has confirmed the truest meaning of the phrase “Follow the money.” And we do. We have conducted a forensic investigation of tremendous scope, engaged and instructed international counsel, brought multiple legal actions in many international courts, and cooperated with local law and regulatory enforcement bodies around the globe.

We allege that a global community – the banks we have sued and the wealthy individuals we are pursuing – knew of and aided Madoff’s Ponzi scheme by creating structured financial products (often leveraged derivatives) tied to Bernard L. Madoff Investment Securities LLC (BLMIS) to sell to their favored clients in order to “take advantage” of the famous Madoff returns. In addition, “feeder funds” – almost all of them foreign-incorporated entities – also fueled Madoff’s Ponzi scheme, and many of them would eventually grow into major, seemingly independent enterprises, like Fairfield Sentry and Tremont.

International entities became an important component of Madoff’s sales pitch, helping convince customers that he was trading overseas. But Madoff didn’t just hang a shingle in London as part of a sales ploy. He also often covered losses in his trading operation indirectly with funds that were transferred from his New York investment advisory business (BLMIS) to his London-based Madoff Securities International Ltd. (MSIL) and then “laundered” and returned to the United States, a move called “round-tripping.”

The SIPA Trustee’s Racketeer Influenced and Corrupt Organizations Act (RICO) complaint against Sonja Kohn, her family and other related defendants such as Bank Medici, Bank Austria and UniCredit, is instructive as to how global financiers and institutions worked together and with Madoff to feed and perpetuate the Ponzi scheme. Through forensic accounting and exhaustive research, we have uncloaked this international web – which we call the Medici Enterprise – and revealed how these conspirators moved the money around the world and funneled it to Madoff. The Medici Enterprise alone fed more than $9 billion into the Ponzi scheme. And $5 billion of that amount came in after 2005, when UniCredit bought Bank Austria and Sonja Kohn’s Bank Medici and took the enterprise wholesale.

While the Medici Enterprise is among the more fascinating examples, it’s just one piece of the incredible international puzzle that is the Madoff Ponzi scheme. Here are a few more examples:

• The British Virgin Islands and Bermuda are active for a number of reasons, chief among them the litigation with the Kingate feeder funds: Kingate Euro and Kingate Global, which account for more than $1 billion in potential recoveries.
• In Ireland, we are working to secure money channeled to the Thema Fund, a major feeder fund that was fed in part by another closely related feeder fund that was also 100 percent invested with Madoff.
• In the Cayman Islands, we are litigating with a “net winner” feeder fund against which we have a billion-dollar fraudulent transfer claim.
• In Israel, we have active litigation underway against an individual who has attempted to transfer substantial funds to relatives in an attempt to prevent the SIPA Trustee from recovering them for the Customer Fund.
• In Liechtenstein, we actively participate in several criminal proceedings in connection with the Medici Enterprise and have facilitated the freezing of millions of dollars held by Sonja Kohn, her family and their co-conspirator, Urszula Radel-Leszcynski.
• In Austria, we also actively participate in several criminal proceedings as we seek to identify and pursue assets fed into the Ponzi scheme that passed through Sonja Kohn’s Bank Medici, Bank Austria, UniCredit, and their associated feeder funds.
• In the United Kingdom, we have joined forces with the court-appointed liquidator of MSIL in a litigation that involves Sonja Kohn, members of the Madoff family and other MSIL directors and officers. Through this collaboration, we anticipate recovering substantial funds for the Estate.
• Together with the liquidator of MSIL, the SIPA Trustee successfully sought a worldwide freezing order against Sonja Kohn, which has helped the liquidator identify and freeze approximately £27 million of her assets as legal actions proceed against her and other members of the Medici Enterprise.

All of these cases present an opportunity for significant recovery for BLMIS customers. While we are pursuing our cases in these jurisdictions with the same vigor as in the United States, it is worth noting that our international adversaries, like those here, are working to prevent the SIPA Trustee from recovering these monies for the Customer Fund and returning them to BLMIS customers.

When the liquidation of BLMIS began in December 2008, we faced an unprecedented challenge: uncovering the facts behind the decades-long Madoff Ponzi scheme, the largest financial fraud in history. Our world-class team of legal, accounting and investigative professionals had to start from scratch – with no assistance from the fraud’s perpetrators – to reconstruct the truth behind the massive, intricate financial fraud. That is challenging enough in our home country. And the complexity only grows when that work is multiplied in more than 30 international jurisdictions, each with its own unique legal system and financial regulations.

Also adding to the challenge is the organic evolution of legal systems in every jurisdiction over time, as certain cases reach the highest court level and subsequent decisions potentially affect existing proceedings. For example, the Rubin v. Eurofinance case, recently decided by the United Kingdom Supreme Court, reflects the second time in recent years that the issue of enforceability of foreign default insolvency judgments has changed – and changed dramatically. While decisions such as this can pose a challenge to the SIPA Trustee, they also highlight the fact that modern international insolvency law is in a constant state of flux as it tries to keep up with the ever-changing technological framework underlying modern financial transactions. We remain at the forefront of these new developments, ready to respond to these changes when they come, and to forcefully argue for innovation in the law when such changes are necessary and appropriate.

I hope this brief overview of our international litigation will help convey the strong effort we are making on numerous fronts in this multifaceted liquidation. Our worldwide push to maximize recoveries for the Customer Fund is ongoing, so please check back from time to time for an update on the activities of the SIPA Trustee and his global teams.

International

 A Message from the SIPA Trustee’s Chief Counsel, David J. Sheehan

July 12, 2012 - With the Supreme Court’s decision in late June to pass on a challenge to the equity calculation formula struck by the SIPA Trustee, the biggest hurdle to future distributions has now been removed. Though the occasion won’t make as many headlines as the collapse of Bernard Madoff’s Ponzi scheme, it should be big news that Madoff’s investors are finally going to be getting more of their money back.

Unraveling the most massive global fraud of all time was never going to be an easy task, and at times progress has seemed frustratingly slow to Madoff’s victims. This is par for the course in any bankruptcy, with creditors fighting over a limited pool of assets available to satisfy their claims.

But the Madoff case has been orders of magnitude more complicated, due to the size, extent, and duration of the fraud. With so much money gone up in smoke the moment Madoff’s frauds were revealed, the legal infighting to recover false investment returns paid out by Madoff was destined to be fierce. There was also a real risk that the courts would hold much of the money to be beyond the reach of the Trustee, denying a meaningful recovery to those who hadn’t withdrawn funds before the collapse. Indeed, at the outset, some pundits expected recoveries of just pennies on the dollar and even that after a decade or more of litigation.

But the pundits were wrong. The results to date not only belie their worst-case scenario, but also reflect a recovery effort far more successful than nearly anyone expected.

The numbers truly speak for themselves. The Trustee has recovered or reached agreements to recover more than $9.1 billion for Madoff customers since his appointment in December 2008— equivalent to $7 million a day. These recoveries exceed prior recovery efforts related to all other Ponzi schemes, in terms of dollar value and percentage of stolen funds recovered.

But the best evidence may be the prices at which Madoff claims are trading on secondary markets. While many Madoff customers have held on to their claims, others sold them at a discount to investors so as to avoid the uncertainty and delay of the resolution process. To date, nearly $2.8 billion of allowed claims have been sold, the equivalent of approximately 40 percent of the claims allowed by the Trustee.

Since December 2010, when the Trustee announced a major settlement to recover money Madoff had paid out to investors before his firm collapsed, claims have been trading in excess of 60 cents on the dollar, an unusually high value in any bankruptcy case. And as more money has flowed to the Trustee, the value of Madoff claims has risen.

More of those recovered funds will soon be making their way to Bernard Madoff’s victims. To date, the Trustee has distributed more than $1.1 billion, with the first interim distribution in October 2011. That includes more than $802.3 million in advances requested on victims’ behalf by the Trustee.

But further distributions were stymied by legal challenges to the distribution formula meant to insure fair and equitable treatment of all Madoff’s customers. A small group of Madoff clients argued all the way to the Supreme Court that distributions should be based on the final set of account statements sent by Madoff Investments, reflecting years of fictional gains. That argument was soundly rejected by the Bankruptcy Court and Court of Appeals, and the Supreme Court’s decision not to hear their final appeal settles the matter once and for all.

It also clears the way for further distributions to victims over time, amounting to billions of dollars. Additional billions in recoveries may yet come from litigation over pending claims.

Making right Bernard Madoff’s wrongs has been a long and complex process, and it has been understandably frustrating to both his victims and the public. A quick recovery was never in the cards, given the depths of the investigations required to trace Bernard Madoff’s fraud and the fact that parties involved in the bankruptcy always have the right to challenge the Trustee’s actions through slow-moving litigation. But it is time for the focus to shift to the substantial and important progress that has been made as we continue working toward further success.

David J. Sheehan
July 12, 2012

Claims

 A Message from the SIPA Trustee’s Chief Counsel, David J. Sheehan

Bernard Madoff’s unprecedented fraud stretched far and wide. Our recovery efforts and lawsuits are not only taking place here in the United States; our work extends around the globe, including Austria, England, France, Gibraltar, Italy, Liechtenstein, Luxembourg, Spain, and the Caribbean.

With so many actions and jurisdictions involved, this liquidation is one of the most complex recovery efforts ever undertaken. Thousands of parties are involved, and probably a comparable number of reporters, bloggers and assorted commentators are covering Madoff-related news worldwide. Given the number of participants in this unfolding story with differing agendas, it is not surprising that some of the public statements and coverage are misleading or incorrect.

With that in mind, I will use this column, today and in the future, to clarify and comment on key issues. In this message, I’d like to address two important topics that have gotten a great deal of media attention.

First and foremost, I want to emphasize that every penny of the more than $9.1 billion recovered thus far through our efforts will ultimately be distributed to BLMIS customers with allowed claims. The professional fees of the SIPA Trustee, Irving H. Picard, and those of his counsel are not paid for by any of the funds recovered for the BLMIS Customer Fund – all fees and expenses incurred by the SIPA Trustee and his counsel in pursuit of recoveries are paid for out of a fund maintained by the Securities Investor Protection Corporation. Any assertion to the contrary is just plain wrong.

Second, I’d like to provide a brief overview of the status of the appellate process that affects the timing of payouts from the Customer Fund. On December 17, 2010, the SIPA Trustee and the United States Attorney’s Office for the Southern District of New York announced a historic settlement with the estate of Jeffry Picower in the amount of $7.2 billion. Of that amount, $5 billion was recovered by the Trustee while the remainder was forfeiture to the U.S. government. It is undisputed that this entire amount constituted fictitious profits – other people’s money – which rightfully belongs to the BLMIS customers who have, in the aggregate, filed claims for the more than $17 billion in principal which they lost.

Almost a year and a half later, the Picower settlement remains under appeal. As a result, billions of dollars that would be available for distribution to victims who never got their money back are being held up. When the appeals are finally resolved, the $5 billion will become available for allocation to the Customer Fund.

Even when that happens, however, the SIPA Trustee would only be able to distribute approximately 12 percent of the recovered funds due to the outstanding appeal of the net equity issue. The Second Circuit Court of Appeals recently upheld the decision of Judge Burton R. Lifland of the United States Bankruptcy Court for the Southern District of New York, which affirmed the Trustee’s determination that in this liquidation, allowable customer claims, or “net equity” claims, are governed by the Net Investment Method – a “money in, money out” calculation formula. This means that those BLMIS customers who withdrew little or none of their principal are given a priority in distributions from the Customer Fund. Several parties sought to have the Second Circuit reconsider its opinion, but that request was denied. Currently there is an effort by appellants to have the ruling reviewed by the United States Supreme Court.

We believe that these appeals are without merit. Until they are finally concluded, however, the appeals inevitably delay the return of stolen funds to BLMIS customers. We will continue to do all we can to accelerate the process, clear the path and distribute funds as quickly as possible.

The SIPA Trustee’s primary goal is to make customers who have not yet received back all the funds they deposited into BLMIS whole. To that end, the SIPA Trustee and his counsel will continue to vigorously pursue all lawsuits, first, to fill the Customer Fund for the benefit of those customers who did not get their initial deposits back, and second, to create a General Estate in which all victims of Mr. Madoff’s fraud may share, excepting those who are found to have acted in bad faith.

To date, more than $1.1 billion has been returned to allowed claimants. While this may seem like a small step in the total recovery effort, it is just the beginning. We want to assure all of the victims of Mr. Madoff’s fraud that we will continue in our efforts to recover the maximum amount of funds possible, so that all victims may receive some recompense for the harms they suffered.

David J. Sheehan Updated May 18, 2012

Overview