Since the Madoff scandal broke in December, the question over how to pay victims has loomed; on February 2, victims will finally get to argue their preferred method of compensation calculation in court.
But the maths is complicated. “There are thousands of potential victims of Madoff’s crimes and, during the fraud, Madoff solicited billions of dollars of funds over a period of decades” prosecutors previously told U.S. District Judge Denny Chin. “[Madoff’s company]’s records have not yet allowed for a definitive compilation of victims or a precise computation of the amount of loss suffered by each identified victim.”
That means a formula must be developed that most fairly compensates victims without dragging out the process for years; the victims and Irving Picard, the liquidator of Madoff’s firm, strenuously disagree about which formula to use.
Defining “net equity” is at the heart of the dispute, according to DealBook. Customers say net equity means the amount they had in their account on November 30, 2008, when the Ponzi scheme fell apart. Picard defines “net equity” as the difference between the cash customers invested with Madoff versus what they took out over the lifetime of their Madoff investments.
These calculations can have widely different results, especially in light of recent disclosures that less than half the Madoff victims lost money over the lifetime of their investments.
The money will come from the Securities Investor Protection Corporation, an FDIC-like government-chartered agency that insured failed brokerage accounts up to $500,000.
The battle between the victims and Picard is getting increasingly ugly, as some victims try to limit Picard’s role to his involvement with the SIPC. A group of them requested the judge bar prosecutors from hiring Picard to help distribute the forfeited Madoff assets, Bloomberg reported yesterday. He is “the last person in the world who should be involved,” counsel for the victims told the Court.
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