Madoff Trustee Sets Record Date of September 15th for Victims Entitled to First Distribution

According to a court filing by the trustee tasked with marshalling assets for the benefit of victims of Bernard Madoff's multi-billion dollar Ponzi scheme, investors holding claims as of September 15th, 2011, will be entitled to receive the $272 million set aside for a first interim distribution.  Additionally, Irving Picard, the court-appointed trustee, also stated that holders of claims that were sold or transferred are eligible to receive a distribution only if the sale or transfer of the claim was made on or before August 25, as such sale or transfer is subject to a 21-day notice and objection period.  As Bloomberg reports, the initial distribution will go out by the end of the third quarter, or September 30th.  

In his Motion for an Order Approving Initial Allocation of Property (the "First Distribution Motion"), filed May 4, 2011 and approved by United States Bankruptcy Judge Burton R. Lifland on July 12, 2011, Picard sought to make an initial distribution of $272 million to Madoff victims, an amount that Picard stated would have been much higher if not for the pending appeals preventing the availability of additional funds.  As explained by Picard,

The reduced amount is the result of various appeals that have been filed, including, but not limited to, the appeal relating to the “net equity” dispute, ... the appeals relating to the $5 billion Picower settlement, ... and the appeal relating to the settlement with the Levy family.

The distributions will be paid on claims relating to 1,224 former accounts at Madoff's brokerage.  According to Picard, the average payment amount to each of those holders will be $222,551.12.

Legal developments since the First Distribution Motion have bolstered the position of investors Picard termed "net losers" whose account losses exceeded any withdrawals.  The most important decision was the August 16th order of the Second Circuit Court of Appeals affirming the method Picard used to determine investor claims.  While some investors argued that they were entitled to recover the market value of the securities reflected on their last account statement before Madoff's scheme collapsed, Picard disagreed, arguing that the class of customers with allowable claims were those who deposited more cash in their investment account than they withdrew.  The Second Circuit agreed with Picard's method, stating that:

Use of the Last Statement Method in this  case would have the absurd effect of treating fictitious and arbitrarily assigned paper profits as real and would give legal effect to Madoff’s machinations. 

This decision was an important victory for Picard, who was forced in his First Distribution Motion to "maintain... significant reserves, which decrease the amount available for distribution from approximately 44% to approximately 13%."  This percentage was further reduced to 4% of claims due to various settlements under appeal.  Assuming that the Second Circuit's order is not appealed to the Supreme Court, it is likely that Picard's next distribution to investors will have significant additional funds available.

A Copy of the First Distribution Motion is here.

A Copy of Picard's filing setting the Record Date is here.

A Copy of the Second Circuit's Order Affirming the Net Investment Method is here.