Kathy Bazoian Phelps
Senior Counsel in Ponzi Scheme Litigation
and Bankruptcy Matters

Kathy is a senior business trial attorney with more than 30 years experience prosecuting and defending claims for high net worth clients involved in Ponzi scheme matters and in bankruptcy proceedings. Kathy’s practice includes recovering assets for clients in complex fraud cases under standard fee and alternative fee arrangements. She also handles SEC and CFTC whistleblower claims. Kathy also serves as a mediator in bankruptcy matters, in complex business disputes, and in matters requiring detailed knowledge about fraud or Ponzi schemes.

Kathy’s Clients in Ponzi Scheme Cases and Bankruptcy Matters
Equity Receivers
Bankruptcy Trustees
High Net Worth Investors
Debtors in Bankruptcy
Secured and Unsecured Creditors

Wednesday, June 6, 2012

NY Times Column Criticizing Madoff Trustee Flawed on Many Levels

Posted by Kathy Bazoian Phelps

A recent New York Times article by Andrew Ross Sorkin severely and unfairly criticizes Irving Picard, the trustee for the Bernard L. Madoff Ponzi scheme. It states, “Mr. Picard has had much more success collecting money for himself and a dozen law firms and consultants than any victim of Mr. Madoff’s crime.” A copy of the article is attached here.

These remarks appear to be intended to inflame the public. Irving Picard is the neutral fiduciary charged with collecting funds for investors. He is not Bernie Madoff. Picard did not run a Ponzi scheme. The New York Times article makes sweeping, conclusory statements about Picard and his professionals, sensationalizing the compensation paid to them, without considering the facts, the law, or the process of unwinding a Ponzi scheme of this size and scope. I have no affiliation with Picard or his firm, although he did endorse a book that I co-authored, The Ponzi Book: A Legal Resource for Unraveling Ponzi Schemes (LexisNexis 2012). I do, however, have a strong familiarity with Ponzi cases and the work required to unravel them. As a rebuttal to the New York Times’ attempt to unfairly prejudice the public against the team charged with undoing Madoff’s epic fraud, I present the following insights into Ponzi schemes and the Madoff Ponzi scheme in particular.

First, the article states that Picard and his professionals have been paid $554 million and that the victims have only “actually received” $330 million. As written, this is quite misleading. Picard has actually recovered $9.1 billion. This is not a small number. The reason he hasn’t paid that to victims is that those funds are tied up in connection with pending appeals.

The professional fees paid to date are 6.1% of the recoveries. Picard himself has been paid $5.1 million, which is 0.06% of recoveries. This is for 3½ years of work. Is this really so outrageous? It’s a good thing he didn’t hire contingency counsel at the going rate of 40%. Those fees would have been a whopping $3.64 billion!

Second, let’s consider the size of the estate that Picard is administering. As noted, it is $9.1 billion in recoveries so far, with claims of about $17.3 billion in principal investments. Incredibly, the New York Times criticizes Picard for attempting to recover more than the lost principal, stating: “In the last several years, Mr. Picard has brought more than 1,000 cases seeking more than $100 billion on behalf of victims, despite acknowledging that only about $17.3 billion had actually been invested by customers.” Yes, Picard is trying to recover funds in excess of the investors’ principal investments. But clearly this is so that he can distribute recoveries to investors due to their lost expected profits, which could be as much as $65 billion.

Wouldn’t Madoff’s victim sharply criticize Picard if he decided to shut down recovery efforts when he had just enough to pay the investors’ principal claims, but not their lost profits? The investors lost the use of their money by investing with Madoff. Shouldn’t Picard at least try to get them some interest if there are recoveries available under law for that purpose? Is Picard to leave money on the table by not pursuing additional recoveries for defrauded investors just because it is costing a small fraction of those amounts to try to collect those amounts?

Third, the New York Times article adopts, without question or analysis, the lower court decisions dismissing some of Picard’s claims. But those decisions are presently on appeal. The issues on appeal are issues being raised by other trustees and receivers across the nation in other Ponzi cases, and many of them have been brought with great success. So let’s wait to see the outcome of these appeals before we judge Picard’s strategy.

Picard may or may not prevail in these appeals. Still, can we really condemn him for trying to recover money from financial institutions and others who he alleges knew or should have known about Madoff’s fraud and about the billions of dollars of fraudulent funds that passed in and out of their accounts? If Picard’s claims are dismissed on standing or in pari delicto grounds, he would be merely one of many frustrated trustees denied the opportunity to recover money for defrauded investors on arguably unfair technicalities, even in the face of clear liability.

Perhaps it is not Picard whom we should be criticizing, but rather the system that allows wrongdoers to escape liability while defrauded investors are left with potentially shattered lives. The issues of standing and in pari delicto are complex issues, and they have been applied very unevenly by courts across the country. Let’s not disparage Picard for trying to recover money for investors. Let’s instead examine and reconsider the statutory and case law that mandates these often inequitable results for defrauded investors.

Fourth, let’s put the Madoff case in perspective in relation to the rest of the world. A study prepared by the International Monetary Fund for 2011 shows that 130 of the ranked 182 countries in the world have a Gross Domestic Product greater than $9.1 billion. That means that Picard now manages funds in an amount greater than the GDP of about 30% of the world’s countries. If we look at the total potential size of this estate of $65 billion, then Picard is working in the territory of the top 64 countries in the world. So why all the criticism over Picard’s $850 hourly rate? CEOs of much smaller corporations are paid well over $5.1 million for just one year’s worth of work, and Picard has been working at this for well over 3 years now.

Finally, the full scope of the services that Picard and his professionals have provided is, frankly, overwhelming. Picard’s Sixth Interim Report filed last November reveals much about what Picard has been doing. A small window into the size of the Madoff case is found in a few interesting numbers from that report, as of September 30, 2011:
     -Picard received and reviewed 16,518 customer claims.
     -Picard and his professionals fielded more than 7,500 hotline calls from claimants and their representatives.
     -Picard filed 2,310 objections to claims.
     -In lieu of litigation and its expenses, Picard reached agreements with approximately 440 customers, recovering over $1.7 billion.
     -There is international investigation and litigation in over a dozen countries.

A copy of Picard’s report is attached here.  And this is just a snapshot of what Picard did during one reporting period.  This does not include the massive number of settlements and lawsuits that Picard and his professionals have handled successfully to date in achieving recoveries for Madoff’s victims.

The article concludes with this seemingly uneducated speculative remark:

Nobody is asking Mr. Picard or his legal team to do all this work pro bono.  But given the amount of money at stake and the epic size of the crime, one would hope that he would have pursued a more effective legal strategy that would have made a lot more money for the victims than the lawyers.
The reader is left asking the following questions:

          What is the concept for a “more effective legal strategy”?

          Will that “more effective legal strategy” recover funds for investors?

          Will that “more effective legal strategy” cost any money to implement?

Let’s remember that Picard is not the bad guy here.  He is the court-supervised fiduciary managing an estate the size of a small country with an army of necessary professionals to assist him navigate his way through the morass that Madoff left behind.

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