Beginning Wednesday, the federal court in Manhattan will be the forum for three important issues affecting investors caught in the widening scandal surrounding Bernard Madoff, accused of operating a $50 billion Ponzi scheme.
NEW YORK — Beginning Wednesday, the federal court in Manhattan will be the forum for three important issues affecting investors caught in the widening scandal surrounding Bernard Madoff, accused of operating a $50 billion Ponzi scheme.
Most important, Judge Louis Stanton of U.S. District Court, who is handling the civil case against Madoff, is being urged to consider broadening the protections available to investors in failed Wall Street firms to allow for the “devastating” circumstances of the Madoff scandal.
Stanton has also set Wednesday as the deadline for 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 tell the judge if the report is not on time.
And finally, the court has been notified by the trustee overseeing the liquidation of Madoff’s brokerage firm that he will send out the first mass notification to customers by the end of next week.
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These developments are paralleling a federal criminal case accusing Madoff of securities fraud, based on accounts that he confessed to his sons 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 Madoff operated a brokerage firm, some of his direct investors may be covered under the Securities Investor Protection Corp. (SIPC), a federal fund created to cover fraud losses in brokerage accounts.
But many victims were not direct customers of the Madoff brokerage firm, Bernard L. Madoff Investment Securities. Instead, they had invested in “feeder funds,” some of them operated by well-known Wall Street figures, which in turn invested with Madoff.
In a letter posted in the court docket Monday, one of those indirect investors — Daniel Goldenson of Bremen, Maine — urged Stanton to consider looking past those feeder funds to the individuals ultimately affected by Madoff’s collapse.
They, not just the feeder funds, should be considered direct customers of Madoff’s firm, 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,” 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.”
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 the request.
Stephen Harbeck, the president of SIPC, said in an interview that he could not predict whether the judge would follow Goldenson’s suggestion.
The key 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 court he is ready to send out the first published and mailed notices to Madoff customers by Jan. 9.
Given early accounts that the records for 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.
That speed has come with a price tag.
The trustee, Irving Picard of the Baker Hostetler law firm, is also asking Stanton to approve the payment of $28 million in expenses relating to the Madoff liquidation. The money would cover salaries and benefits of employees continuing to work at the Madoff’s revenue-producing trading business.