A group of hedge fund investors, including over 20 pension
funds representing unions in New York State, has received a
welcome Christmas present a court decision that will
allow them to eventually recover money they invested in funds
operated by Bernard L. Madoff Investment Securities. In 2009,
Madoff pleaded guilty to operating what may have been the
largest financial fraud in U.S. history, with losses now
estimated at around $18 billion and is serving a 150-year
sentence. But his victims wont see their money any time
soon, a lawyer representing the plaintiffs told
Institutional Investor in a recent interview.
The total sum to be recovered is modest $206 million
and may have been higher if the plaintiffs had taken the
Madoff estate to court. But investors in the two White Plains,
N.Y.based hedge funds that acted as Madoff feeder
funds, Beacon Associates and Andover Associates, decided to
negotiate a settlement with the trustee in charge of
liquidating Madoffs firm instead of taking the case
through litigation. In addition to individual and family-office
clients, investor clients of the two funds included local
unions all over New York State representing carpenters,
electricians, engineers, plumbers and other working people.
Negotiating gave us certainty that the investors would be
made whole and potentially make a profit, and wed be able
to recover the funds faster, says their lawyer, Arthur
Jakoby, an attorney with Herrick, Feinstein of New York.
It will not be all that fast, however. Although the U.S.
Bankruptcy Court, Southern District of New York, approved the
settlement on December 4, the U.S. District Court still has to
approve the class-action claims. That verdict is unlikely to
occur before the second half of 2013, according to the lawyers
for the case.
Still, it is a victory that didnt come easily. The
funds had asked for a total of $141 million to replace their
losses, working with the New York State Attorney Generals
office, the U.S. Department of Labor and several other law
firms in addition to Herrick, Feinstein. In December 2010,
after representatives for Andover and Beacon and their
investors had petitioned Madoff trustee Irving Picard and Ivy
Asset Management, Beacon and Andovers former outside
investment advisor, the trustee started an adversary proceeding
against Andover, Beacon and other investors involved in the
There has been discussion in legal circles about the extent
to which Madoffs victims should have placed more
responsibility on the auditors and accountants for feeder
funds. In a complaint filed in bankrupty court, the trustee
said the funds had or should have had concerns about the
validity of Madoffs operations going back to the early
1990s and accused them of purposefully choosing to
disregard the indications of fraud in favor of the
generous fees and returns being generated.
After multiple mediation sessions and extensive
negotiations, however, the trustee agreed to seek a resolution
rather than litigate. The legal team worked out a settlement
with Ivy and Picard at the same time. The terms require the
Madoff estate to pay back the $141 million plus most of an
additional $28.31 million that the funds had withdrawn from
their Madoff accounts, along with interest and lost profit,
bringing the total settlement to $206 million.
With all of the settled amounts combined, the
investors are likely to recover more than 100 percent of their
principal investment and make a profit on their Madoff
investment, says Jakoby. The distribution is still to be
determined after the district court approves the settlement.
That should be in plenty of time for Christmas 2013.