The postman rings twice for Madoff victims; for some, too late

April 2014 | PROFESSIONAL INSIGHT | BANKING & FINANCE

Financier Worldwide Magazine

The deadline for applications to the Madoff Victim Fund (MVF), a US government initiative to distribute $4bn among investor victims of the Madoff case, is 30 April. The $4bn, derived from the forfeiture actions associated with the crimes, will be used to compensate the many investors who were not compensated during the bankruptcy proceedings of Mr Madoff’s entity, in which only direct investors could present claims.

In this alternative recovery process, as applicants only have to prove they made a direct or indirect investment that was affected by Mr Madoff’s fraud, this opens the process to a greater number of potentially eligible victims.

The initial deadline of 28 February has been extended until 30 April to give the victims, scattered all over the world, more time to complete applications. After that, applications will be evaluated and payments made. The authorities calculate that investors could recover at least 25 percent of their investments.

This laudable initiative will surely serve to compensate, if only partially, the thousands of victims that suffered at the hands of Mr Madoff’s Ponzi scheme.

However, as the MVF was not established earlier, potentially unfair situations could arise. This will be the case for entities that marketed or managed for their clients investments affected by the fraud, and against which judgment was given in civil proceedings in several countries. In Spain, one of the most well-known cases even made it to the Supreme Court, which, in its judgment of 17 April 2013, ruled against Banco Espirito Santo, ordering it to repay an investor that had lost €500,000 in an investment in Fairfield. The investor should have recovered the total invested by now, including interest, and thus, would not have standing, interest or need to submit a claim to the MVF. However, the bank cannot claim compensation from the MVF, as it does not fit the definition of a direct or indirect investor in Madoff Securities.

If the MVF had been established earlier, the bank sued in the case above could have requested that the civil proceedings be suspended until the outcome of the claim submitted to the MVF and the real amount of loss were revealed. In reality, in many of the proceedings filed in Europe against entities that marketed these investments, the claims arose not so much because the entities had committed serious irregularities, but because they were solvent entities with headquarters in the same jurisdiction as the victims. This was an easier and cheaper way for the victims to seek the compensation they believed they would not receive through bankruptcy proceedings.

In cases where rulings dismissed proceedings, claimants can now take advantage of this second opportunity by submitting a claim to the MVF to recover at least some of their investment.

What about cases in which a final judgment has not yet been issued? The logical step would be to suspend the proceedings, or at least enforcement of the judgment, until the MVF’s process for assigning compensation has concluded. Claimants are obliged to do everything possible to mitigate their losses, and therefore, to submit the appropriate claim to the MVF to recover some of these; otherwise, the amount assigned to them in a possible favourable judgment could be reduced. While the MVF process is underway losses are not final, and as no loss can be compensated unless it is quantified, it would make more sense to suspend all ongoing proceedings until the loss is quantified.

In short, this is a second chance for victims that had not filed any claims, and for those whose petitions were rejected in the bankruptcy proceedings of Mr Madoff’s company or in actions against financial entities and funds involved in the investments, which will more than likely enable them to recover some of their losses.

However, for proceedings already closed with final judgments in favour of the claimants, the MVF will not enable the entities that have been found liable to recover any losses. For these, the postman’s second ring has come too late.

Jorge Capell is a partner at Cuatrecasas, Gonçalves Pereira. He can be contacted on +34 915 247 621 or by email: jorge.capell@cuatrecasas.com.

Jorge Capell

Cuatrecasas, Gonçalves Pereira