US: Madoff Case Faces Crucial Disclosure Deadline

Publisher Name: 
New York Times

The federal court in Manhattan will be the forum in the coming weeks
for three important issues affecting investors caught in the widening
scandal surrounding Bernard L. Madoff, who is accused of operating a $50 billion Ponzi scheme.

Most
important, Judge Louis L. Stanton of United States District Court, who
is handling the civil case against Mr. Madoff, is being urged to
consider broadening the protections normally available to investors in
failed Wall Street firms to allow for the "devastating" circumstances
of the Madoff scandal.

Judge Stanton has also established
Wednesday as the deadline for Mr. Madoff to provide federal securities
regulators with a full accounting of his and his New York firm's assets
- from real estate to art works to bank accounts. Regulators are to
notify the judge if the report is not filed on time.

And finally,
the court-appointed trustee overseeing the liquidation of Mr. Madoff's
brokerage firm has announced that he will send out the first mass
notification to customers of the firm by the end of next week.

These
developments in the civil case are paralleling a federal criminal case
accusing Mr. Madoff of securities fraud, based on accounts that he
confessed to his sons on Dec. 10 that his entire business was "a lie"
and a giant Ponzi scheme. According to court filings, he himself put
the losses as high as $50 billion.

Because Mr. Madoff operated a
brokerage firm, some of his direct investors may be covered under the
Securities Investor Protection Corporation, a federal fund created to
cover fraud losses in brokerage accounts.

But many of the victims
were not direct customers of the Madoff brokerage firm, Bernard L.
Madoff Investment Securities. Instead, they had invested in various
"feeder funds," some of them operated by well-known Wall Street
figures, which in turn invested with Mr. Madoff.

In a letter
posted in the court docket on Monday, one indirect investor - Daniel R.
Goldenson of Bremen, Me. - urged Judge Stanton to consider looking past
those feeder funds to the individuals ultimately affected by Mr.
Madoff's collapse. They, not just the feeder funds, should be
considered direct customers of Mr. Madoff's firm, Mr. Goldenson argued.

He
acknowledged in his letter that a strict reading of the SIPC guidelines
would not treat him as a customer. "But in this devastating case we
feel it is appropriate to broaden investors eligibility beyond direct
investments," Mr. Goldenson wrote.

"Please consider broadening
access to SIPC for all individuals who lost so much or all of their
life savings," he concluded. "This was an intertwined system of deceit
and theft within our financial markets that has left retirees like
ourselves having to sell our homes and raise money any way we can."

Judge
Stanton acknowledged the letter, but simply cited the early stages of
the case and the complex legal issues that surround eligibility for
brokerage-account protection without indicating whether he would
consider Mr. Goldenson's request.

Stephen P. Harbeck, the
president of SIPC, said in an interview that he could not predict
whether the courts would follow Mr. Goldenson's suggestion. The crucial
step now, he said, is for affected investors to submit their claims, so
that they are on the record as the legal issues are worked out.

That
process is ready to move forward, as the trustee working for SIPC has
notified the federal bankruptcy court handling the liquidation of the
Madoff firm that he is ready to send out the first published and mailed
notices to Madoff customers by Jan. 9, a week from Friday.

Given
early accounts that the records for Mr. Madoff's money management
clients were found in considerable disarray, the announcement came
earlier than many lawyers in the case had expected and will speed up
the day when the legal issue of SIPC coverage can be considered in
court.

On Tuesday morning, Federal Bankruptcy Judge Burton
Lifland approved a request from the trustee, Irving H. Picard of the
Baker Hostetler law firm, to transfer $28.1 million to cover on-going
expenses for the Madoff brokerage business, including salaries and
benefits of employees.

The funds were transferred to the trustee under an agreement with the Bank of New York Mellon, which holds three of the five bank accounts identified in court papers as be-longing to Mr. Madoff or his firm.

AMP Section Name:Financial Services, Insurance and Banking
  • 185 Corruption
  • 208 Regulation