I have a certain amount of sympathy for the Madoff victims, but I’m not sure it extends to giving them an AIG sized bailout. According to the Times ( “Victims of Madoff Seek Claims Overhaul“):
In a step that would substantially increase the price tag for Bernard L. Madoff’s long-running Ponzi scheme, lawyers for a group of his victims are asking a federal bankruptcy judge to reject the way their losses in the fraud are being calculated.
The customers say that, by law, they should be given credit for the full value of the securities shown on the last account statements they received before Mr. Madoff’s arrest in mid-December, even though they were bogus and none of the trades were ever made. According to court filings, those account balances add up to more than $64 billion.
Apparently, if the money the court appointed trustee recovers from Madoff is not sufficient to cover the losses, we taxpayers will be making up the difference (once the money in the Securities Investor Protection Corporation runs out). In some cases, Madoff simply padded his favored customer’s statements, giving them a greater benefit from the fraud than others. The victims argument would have the effect of making the government guarantee not just the losses, but the promises of the fraudster themselves.
It so happens that I was involved in litigation involving a Ponzi scheme some years ago, albeit a much cruder variant than Madoff practiced. Let us call the Ponzi practitioner “J.S.” J.S. took money from his investors and gave them back promissory notes payable in 6 months at 12% annual interest. That’s not so outrageous, except he also promised them substantial weekly payments in addition to the interest (with no reduction in principal) during the life of the loan. The effective rate of return was on the order of a couple of hundred percent or more.
Okay, I agree, anyone should have realized it was a scam. Yet in fact, when all is said and done, I’d say the mix of honest dupes, semi-honest dupes, and “investors” who figured they’d make out well before the house of cards fell down was probably pretty close to the like percentage in the Madoff case.
I got involved when some investors came to me when J.S. stopped paying. I couldn’t interest the Norwich police, who said it was a civil matter. (Eventually the feds thought differently, and J.S. did time). I told my clients we could sue in civil court, but I was sure we would never recover a dime.
Then, a miracle happened.
J.S. won 9 million dollars in the Massachusetts lottery. We saw his smiling face on the front page of the New London Day, and within weeks Mark Block and I brought him into involuntary bankruptcy, and a trustee was appointed (for some reason the Judge wasn’t willing to let J.S. run his own affairs in a Chapter 11), the winning lottery ticket (which paid off over a term of years) was sold, and the “investors” were paid.
They were paid in pretty much the same manner as the Madoff trustee proposes paying the Madoff victims. They were paid a percentage of the difference between the amount they invested and the amount of payments they received from J.S. It would have been laughable to insist that the weekly payments not be considered in determining the amount due, even though, according to J.S., those payments didn’t reduce the principal amount of the debt at all. People who got in early would have been advantaged over latecomers, for no particular reason.
Now there are differences between the two cases. As I say, J.S. was rather crude compared to Madoff, and his victims were definitely middle class, not the affluent types that Madoff targeted. Still, when it comes to determining a fair way to determine losses, its hard to beat the way we did it, or the way the trustee proposes in the Madoff case. The investors have a right to get their money back, but they don’t have the right to have Madoff’s promises fulfilled, particularly if we the taxpayers have to fulfill them. It’s bad enough we had to pay off on AIG’s credit default swaps, we should certainly not have to guarantee performance of a Ponzi scheme. (Okay, maybe credit default swaps are a lot like Ponzi schemes, but you know what I mean).
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