Almost exactly one (short) month after a hearing on February 2, 2010, Bankruptcy Judge Burton Lifland has issued an opinion upholding Trustee Irving Picard's calculation of "Net Equity" in untangling Bernard Madoff's Ponzi scheme (referred to by the judge as the "Net Investment Method").  (Story here; opinion here; prior posts here and here.)Though many victims had argued that their claims were equal to the balances on their November 20, 2008 statements from Bernard L. Madoff Investment Securities LLC, the judge held that this "Last Statement Method" ignored the fictitious nature of the returns reflected there and any withdrawals made, which necessarily were paid out of victim principal.  Therefore, the judge upheld the Net Investment Method, which defines a valid claim as the principal paid in less withdrawals.  The judge acknowledges that this method will lessen or extinguish many victims' claims.  However, the court states that "[t]he Net Investment Method harmonizes the definition of Net Equity with these avoidance provisions [from the Bankruptcy Code] by similarly discrediting transfers of purely fictitious amounts and unwinding, rather than legitimizing, the fraudulent scheme."

In anticipation of this ruling, three "net winner" victims have filed a lawsuit in New Jersey against the President and Directors of SIPC for running a "fraudulent investment insurance scheme."  Two of the victims have lessened or extinguished claims under the ruling because of withdrawals, but one victim seems to run afoul of the definition of "customer" (she is a member of an LLC that was a customer).  As they say, we will stay tuned.

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