Bloomberg Law
April 15, 2021, 7:06 PM

Madoff’s Case Provides Precedent for Future Ponzi Victim Payouts

Daniel Gill
Daniel Gill

Bernie Madoff, who died in prison Wednesday, perpetrated a historic Ponzi scheme that has shaped the way courts treat such fraud and efforts to recover damages for victims.

The case applied principles of bankruptcy law to establish that trustees can recover money from “net winner” investors of fraud schemes to pay “net losers” by comparing what they contributed to the scheme and what they received.

This method would override an alternative approach that calculated clawback amounts based on company earnings statements.

Those rulings, which originated in bankruptcy court after a clawback case for Madoff’s firm merged with Madoff’s personal bankruptcy case, laid the groundwork for how other courts treat Ponzi schemes.

The Madoff case helped define how courts value investor claims in Ponzi cases and what kind of defenses “winners” can raise to protect payments they received, said Kathy Bazoian Phelps of Diamond McCarthy LLP in Los Angeles.

Legal Precedent Set

Courts involved in the Bernard L. Madoff Investment Securities LLC litigation grouped investors according to whether they ultimately got back more than they contributed.

Net winners—those who received more money back from the firm than they put in—would have to pay back amounts over and above what they invested. The amount clawed back from them would be used to compensate net losers.

The Madoff case set a legal precedent by choosing this net investment method over a “last statement” analysis, said Phelps, who specializes in fraud and Ponzi scheme cases.

The last statement analysis approach considered what the investor was owed according to the company’s most recent statement, which could include fictitious earnings, she said.

The case also put to bed the argument that investors should be allowed to consider inflation or ordinary interest when calculating what they contributed to the scheme, and thus affecting what they could recover in the case, Phelps said.

The U.S. Supreme Court so far hasn’t weighed in, leaving the big decisions to the lower federal courts.

The justices last year declined to review a U.S. Court of Appeals for the Second Circuit ruling that allowed Irving Picard,a New York-based attorney serving as trustee to recover damages, to claw back more than $3 billion from hundreds of oversees investors who received indirect payouts from “feeder funds” that received money directly from the scheme.

A group of net winners has filed a separate petition for Supreme Court review, challenging an order to return millions they received over and above their initial investments. The investors dispute a September 2020 Second Circuit decision that they had to give up the extra money without consideration of whether they gave something of value in exchange for accepting the payments. That argument is typically a defense in bankruptcy clawback actions.

The Supreme Court hasn’t yet made a decision on whether to hear that case.

Not a Bankruptcy Case

The Madoff case has proceeded in bankruptcy court and relied on bankruptcy law concepts, but it’s not a typical bankruptcy case.

In 2008, shortly after federal regulators discovered the fraud, the Securities Investor Protection Corp. asked Picard to serve as trustee to recover damages. SIPC, which is overseen by the Securities and Exchange Commission, is a nonprofit corporation created by the Securities Investor Protection Act of 1970 to oversee the liquidation of brokerage firms.

The U.S. District Court for the Southern District of New York made the appointment official in the liquidating case SIPC filed in December of that year. The case was transferred to the U.S. Bankruptcy Court for the Southern District of New York, which in June 2009 consolidated the SIPA case and Madoff’s personal Chapter 7 bankruptcy case.

Litigation to recover investors’ lost money has proceeded under SIPA, which grants trustees many of the same powers as trustees in bankruptcy cases. Those powers include the ability to claw back money paid to some creditors so that all creditors can share equally in the total recovery amount.

So far Picard has overseen the recovery of more than $14 billion, with a distribution to claimants of over $13.5 billion to date. Those efforts earned fees of roughly $1.23 billion for the trustee and his law firm, BakerHostetler.

“The pain experienced by the victims of Mr. Madoff’s fraud is not diminished by his death, nor is our work on behalf of his victims finished,” Picard said in a statement. “My legal team and I are committed to continuing to identify and recover Mr. Madoff’s stolen funds and return them to their rightful owners.”

Under the law, SIPC pays the administrative and legal costs of a case, rather than those funds coming out of victims’ recoveries, as they typically would in a bankruptcy case.

SIPC “has been intimately involved in the Madoff case” by regularly consulting with the trustee and providing guidance on the interpretation of the law, according to a statement from SIPC CEO Josephine Wang.

—With assistance from Alex Wolf in New York.

To contact the reporter on this story: Daniel Gill in Washington at

To contact the editors responsible for this story: Laura D. Francis at; Roger Yu at