What? After decades of work building up the family store and making the difficult decision to sell, you’re a “winner” when the money you earned disappears overnight?
On the surface, the 2nd Circuit Court of Appeals appears to have made a reasonable decision yesterday in the Madoff case. By limiting the right to monetary recovery to those that were “net losers”—those whose payout from Bernie Madoff was less than their initial investment—trustee Irving Picard seems to have targeted the true “victims” to receive compensation. After all, net winners have made money off Madoff’s scheme, so what right should they have to recovery?
It depends. Say you and your spouse sold your family hardware store for a hard-earned $1 million in 1990. Hoping to live and retire off that $1 million, you invest in the highly-recommended and reportedly successful Bernard Madoff. You don’t know Madoff; you have no reason to believe his fund is anything but legitimate. Over nearly 20 years, you use the interest to pay for your children’s college (and of course, law school), and a house remodel you’ve wanted for years. Eventually, your total interest earnings eclipse $1 million, so when the $1 million principal unexpectedly evaporates in 2008, you’re considered a “net winner”.
What? After decades of work building up the family store and making the difficult decision to sell, you’re a “winner” when the money you earned disappears overnight? Sure, you’ve earned interest, but the funds you’d kept invested were for the future, and you had every reason and right to expect that money to be there.
Tough luck, says Mr. Picard. His decision seeks to recover less than one-third of the total losses due to the Madoff scheme, ignoring the often massive losses of the so-called “net winners”. All of these 2,000 or so investors are without recourse, and what’s more: Mr. Picard has filed hundreds of lawsuits seeking to recover funds from those investors. Sadly, many of these so called “winners” are broke, as most if not all of their money was placed with Madoff.
The 2nd Circuit agrees with Mr. Picard. I do not. The division between “net winners” and “net losers” should not be sacrosanct. Each request should be evaluated on a case-by-case basis. “Net winners” should be granted the opportunity to prove they had no knowledge of the scheme and implicitly relied on the FBI, SEC and other regulatory entities, who year-in and year-out gave Madoff the seal of approval. If they can prove they were unwitting victims, the “net” win or gain should only be the amount they received in excess of a standard rate of return. In other words, their ill-gotten gains (or winnings) are those amounts in excess of the rate they could receive in the market generally.
Assisted by David Martin