On Thursday, September 24th, 2020, the U.S. Appeals Court of the Second Circuit ruled that investors who profited from Bernie Madoff’s massive Ponzi scheme that collapsed in December 2008 must now return their profits.
Bernie Madoff, now 82-years-old, is currently serving a 150-year long prison sentence after he pleaded guilty to federal charges of fraud in 2009. These charges resulted from Madoff running a massive Ponzi scheme that consisted of his securities firm, Bernard L. Madoff Investment Securities LLC (BLMIS), paying back investors with nonexistent funds. According to Bloomberg, an estimated $19 billion was lost by Madoff’s scheme, and his securities firm eventually collapsed after the 2008 financial crisis exposed his firm’s fraudulent behavior.
The victims of Madoff’s Ponzi scheme were not limited to professional investors, but celebrities such as Kevin Bacon, Steven Spielberg, and Larry King also invested in BLMIS and faced the long-term effects of his fraud.
Irving Picard, the trustee assigned to the Bernie Madoff case, is now demanding that investors who profited from the scheme must now return what the gained so that investors whose money was stolen and lost by Madoff can finally be compensated. According to Bloomberg, “After the initial chaos following Madoff’s arrest, Picard has focused on a simple formula to recover principal cash for victims: Suing customers who withdrew more money than they put in. The strategy sparked controversy but was ultimately blessed by the courts.”
Not surprisingly, the U.S. Court of Appeals for the Second Circuit ruled that investors who gained more than what they invested in BLMIS must return their profits to be distributed to the victims of the scheme.
Many of the investors argued that they should be able to keep their gains from Madoff’s actions because their investments were made in “good faith.” In other words, because they were unaware that BLMIS was not actually generating wealth but instead falsifying their figures, they should be able to retain their gains since they were not aware of the fraudulent activity taking place. Picard’s Chief of Counsel, David Sheehan, stated about the “good faith defendants” that “It’s sort of a misnomer. We call them that because we don’t have to prove they knew anything about the Ponzi scheme to get their money back. What they got was fictitious profit.”
However, according to Bloomberg Law, the court persisted, and ruled that “don’t have property or contract rights to profits earned over and above what they invested, even though they were unaware of Madoff’s fraud.”
Madoff’s wealth was built almost entirely on people investing in “good faith,” as the scheme persisted for about 17 years. Madoff was revered as a genius investor and was trusted with money from some of the most high-profile investors and celebrities. However, time proved that Madoff was not a genius investor, but he was a genius concealer; he was able to cover up the largest Ponzi scheme in American history while remaining trusted by a large network of customers and employees.
Trustee Irving Picard, along with his forensic and legal team, have been working towards this goal for over a decade since the exposure of Madoff’s crime, and in 2018, these men told the Wall Street Journal that they would probably be working into this case for at least another five years. His goal is to recover 100% of the funds stolen, although that is unlikely. Instead he aims to recover 5 to 10 cents for every dollar, which, according to the Wall Street Journal, is “typical in a Ponzi scheme case.”
The milestone reached by Picard and his team this month comes after a previous goal hit in 2019. In 2019, they were able to recover $13.3 billion dollars in stolen funds and are now even closer to recovering the approximately $19 billion dollars owed to Madoff’s investors.
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