Madoff Trustee Picard May Take Five Years to Pay Back Investors

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Madoff Trustee Picard May Take Five Years to Pay Back Investors


By Carlyn Kolker and Christopher Scinta

Jan. 21 (Bloomberg) -- Irving Picard, the lawyer seeking to recover money invested with alleged swindler Bernard Madoff, may take more than five years to pay all customers of the man accused of a $50 billion Ponzi scheme.

The 67-year-old Picard is tackling the most complex fraud in the four-decade history of the Securities Investor Protection Corp., the government-backed corporation that hired him, SIPC President Stephen Harbeck said.

Picard was named trustee of Bernard L. Madoff Investment Securities LLC on Dec. 15, four days after prosecutors said Madoff confessed to the crime. Picard was told to liquidate the brokerage, find assets and distribute them to Madoff’s customers.

“This is completely different than anything we’ve experienced before,” said Harbeck, who described Picard as the liquidation’s “fiduciary, administrator and decision-maker.” SIPC was created in 1970 to cover losses when brokerages fail.

Picard and lawyers from his firm, Baker Hostetler LLP, are reviewing records with the help of ex-employees at Madoff’s offices in Manhattan, a person familiar with the case said. Judges gave Picard power to seize assets and records, demand documents, summon witnesses and enter Madoff’s residences around the world, including the apartment where he’s under house arrest.

U.S. District Judge Lawrence McKenna ordered Madoff as a condition of bail in his fraud case to give Picard access to family homes in New York City; Montauk, New York; Palm Beach, Florida, and Cap d’Antibes on the French Riviera.

“Sometimes these days, from what I see in the papers, the most valuable piece of property that individuals have are works of art” that “tend to be on the wall,” the judge said.

$830 Million

So far, Picard and attorneys from Baker Hostetler, the Cleveland-based firm he joined the week he accepted the trustee job, have found $830 million in assets and sent letters to 8,000 potential claimants.

U.S. regulators have said Madoff’s brokerage kept several sets of books and false documents, which complicates Picard’s job of liquidating the business and tracing its assets, according to lawyers who have worked with him.

“He’s got an enormous task ahead of him in terms of gathering information,” said Jay Westbrook, a University of Texas bankruptcy-law professor.

Picard didn’t return calls seeking comment. He declined through a spokesman to be interviewed for this story. Madoff attorney Ira Sorkin, who said he’s known Picard for years, declined to comment on the trustee’s efforts to recover assets.

Subpoena Authority

Among Picard’s challenges are to determine the amount of customer losses, how much Madoff allegedly stole and the location of the firm’s assets, said Michael Goldberg, a Florida lawyer who has handled more than 30 Ponzi-scheme cases. Goldberg was the receiver in a case against concert promoter Worldwide Entertainment Inc., which the Securities and Exchange Commission sued over an alleged $300 million fraud.

Only after Picard has unraveled the web of assets and who they belong to can he begin to pay investors amounts proportional to their losses. Goldberg predicted the case will last more than five years.

“I expect distributions to go out well into the future, because it will involve litigation, and that takes time,” the lawyer said. “You will be talking about this case in 2015.”

Picard has taken steps to sort investor losses and compensate victims. On Jan. 5, he sent 8,000 claims forms to people who appeared to have invested with Madoff. He has found $830 million in “liquid” assets at the brokerage, Harbeck, the SIPC president, said Jan. 5 in congressional testimony.

The trustee probably will get records of every Madoff bank account and ask all customers for their records of transactions with the firm, said Goldberg, an Akerman Senterfitt attorney who has been a receiver, a job similar to trustee, in Ponzi cases.

The Receiver

Lee Richards of Richards Kibbe & Orbe LLP was originally appointed receiver for the Madoff brokerage. When the liquidation proceeding began, his job functions passed to Picard. Richards remains receiver for Madoff’s foreign units. Richards declined to comment immediately.

Picard can expect little help from federal investigators building criminal cases, Goldberg said. The Justice Department typically has little contact with an SIPC trustee, he said.

“It’s a one-way street,” he said.

Picard may create databases designed to include every asset transfer to and from Madoff accounts, Goldberg said. The research will require forensic accountants and lawyers in countries where the firm may have stowed assets, he said.

“It’s constantly following the money trail,” Goldberg said. “Every jurisdiction costs you money, and lots of it.”

Following Lawsuits

Lawyers at Picard’s firm are following lawsuits by Madoff investors to gather information, according to Harry Susman, an attorney at Susman Godfrey LLP. A Baker Hostetler attorney whom Susman declined to identify asked for any information on cases Susman had filed, including client names and courts used.

“He’s probably desperately trying to get information about where the money came in from,” Susman said.

Picard received $1.05 million as SIPC trustee in the five- year liquidation of Park South Securities LLC, a New York-based brokerage involved in a $20 million fraud, court records show. His law firm at the time, Gibbons PC, received $2.8 million.

Picard’s personal fees are capped by law at 3 percent of what he recovers for the estate beyond $1 million. His firm, representing him as the trustee, will handle lawsuits he files and bill for lawyers’ time.

Such an arrangement might create an incentive for a trustee to sue unnecessarily because as a partner he would share in fees the firm earns, said Lynn LoPucki, a bankruptcy law professor at the University of California at Los Angeles. Picard declined to comment on LoPucki’s remark.

‘Very Economical’

Harbeck said the law permits such an arrangement and the corporation’s lawyers and staff review all legal fees.

“I think Irving runs his business in a very economical way,” he said.

Picard first served as a SIPC trustee in the mid-1980s. He has worked on at least nine cases since then, handling more SIPC liquidations than any other attorney, Harbeck said.

The SIPC opens about eight such cases a year. The agency has done 322 since its formation 39 years ago.

Joshua Angel, a lawyer at Herrick, Feinstein LLP in New York who has known Picard for more than 20 years, called the Madoff job “mind-boggling” -- and said Picard is perfect for it.

“Whatever job he takes, he follows the rule book,” Angel said. “He’ll methodically plod through whatever he has to get the job done.”

Picard’s Education

Picard graduated from Boston University School of Law in 1966. He worked at the U.S. Securities and Exchange Commission and was the first Southern District of New York appointee to the Office of the U.S. Trustee, a Justice Department unit that monitors bankruptcies to protect creditor interests.

He served as the court-appointed receiver for the estate of swindler David Bloom, who pleaded guilty in 1988 to defrauding friends and family of $10 million.

In the past decade, Picard was a trustee in SIPC liquidations of Park South and New York-based Montrose Capital Management Ltd.

“He knows the drill on how to maximize recovery when it comes to firms engaged in massive fraud,” said Alan Vinegrad, a litigation attorney at Covington & Burling LLP who was involved in the Park South Securities case.

In that case, Picard paid 22 of 302 investors who requested recoveries, finding many didn’t have valid claims, according to his report to the U.S. Bankruptcy Court in Manhattan in October.

D&O Insurance

In his quest for Madoff clients’ money, Picard may sue companies that provided the firm with directors’ and officers’ insurance, if the brokerage is named as a beneficiary, said law Professor Jonathan Lipson of Temple University.

Suits might be prompted by insurers’ claims that illegal acts aren’t covered, Lipson said. The policies might be one of the most important possible sources of recovery for creditors.

Picard may also sue investors that redeemed money before the fraud was uncovered, including some who were unaware of the scam, Westbrook of the University of Texas said. So-called clawbacks might force investors who took money out as long as six years ago to return profits and, in some cases, principal.

“Trustees are extremely aggressive in recovering assets,” said Harbeck, declining to answer questions about clawbacks.

The SIPC can cover claims of as much as $500,000 per customer. It has $1.6 billion in assets generated by fees on member broker-dealers. Litigation expenses are paid from any assets recovered and could drain money from investors, the lawyers said.

“People are going to be unhappy with the cost, but the trustee has a big job to do and he’s using a lot of resources,” said S. Gregory Hays, a consultant and past bankruptcy trustee.

The SIPC case is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC, 08-01789, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The criminal case is U.S.A. v. Madoff, 1:08-mj-02735, and the SEC case is Securities and Exchange Commission v. Madoff, 1:08-cv- 10791, both U.S. District Court, Southern District of New York (Manhattan).

For Related News and Information:

To contact the reporters on this story: Carlyn Kolker in New York t ckolker@bloomberg.net; Christopher Scinta in New York bankruptcy court at cscinta@bloomberg.net;

Last Updated: January 21, 2009 00:01 EST