Dispute over money recovered from Madoff Ponzi scheme involves Novato accountant
An Orinda man who invested in a fund that fed money into the Bernie Madoff Ponzi scheme is battling with the manager of the fund, a partner in a Novato accounting firm, over how much of the money recovered from Madoff the investor should get.
It's part of the continuing fall-out from the Madoff investment fund meltdown that culminated in 2009, when the New York investment manager pleaded guilty to turning his wealth management business into a colossal flimflam that cost investors an estimated $17.3 billion. He received the maximum allowable sentence: 150 years in prison.
Courts have ruled third-party investors were not directly customers of Madoff's and therefore are not entitled to claim funds in his bankruptcy case. In some instances, however, feeder funds -- funds that invested money with Madoff -- have been able to stake effective claims, and their clients may recover money from them.
Mott Family Investors, a feeder fund managed by Scott Porter, a partner in Novato-based Ghirardo CPA, has been awarded a claim to about $14 million by the U.S. Bankruptcy Court in New York. There is still no guarantee there will be sufficient money recovered to pay the full claim.
Nevertheless, Mott Family Investors sold the rights to its $14 million claim in 2011 to Farallon Capital Management, a San Francisco hedge fund, for about $9.8 million, or approximately 70 cents on the dollar. So far, the bankruptcy court has paid Farallon $5.4
million. Managers at Farallon Capital declined to comment.
Ronald Silberman of Orinda, who invested about $900,000 in the Mott Family fund, is disputing the method that Porter has chosen to divvy up the $9.8 million among the Mott Family fund's investors. Silberman sued managers of the Mott Family fund in Marin Superior Court; but Silberman's agreement with the fund requires him to enter into binding arbitration and the case is being reviewed by a Judicial Arbitration & Mediation Services arbitrator.
Silberman said Porter has decided to divide the money using the "Last Statement Method," which allows investors to use the fictitious amounts listed on their final Madoff account statements as the basis for the amounts they lost. Silberman contends that is unfair; he says investor losses should be the amount deposited into the Madoff firm less any withdrawals, rather than the amount shown on investors' account statements.
"Anybody that withdrew more than they put in were net gainers," Silberman said. "There were a lot of net gainers; but there were more net losers."
Porter did not respond to repeated requests for comment.
In a ruling issued in August 2011, the 2nd Circuit U.S. Court of Appeals in New York agreed with Silberman's position. "Use of the Last Statement Method in this case would have the absurd effect of treating fictitious and arbitrarily assigned paper profits as real and would give legal effect to Madoff's machinations," the court said.
Silberman said another reason he filed suit against the manager of the Mott Family fund is that he would not share financial information about the fund.
"Trying to get real accounting and real bookkeeping records from the general partner was impossible prior to suing him," Silberman said. "It made me wonder why I wasn't getting information as to the real net equity of all the participants. It led me to believe he was hiding something."
Silberman said he wanted to know what percentage of the feeder fund's claim he stood to get before he decided whether to vote for selling the claim to Farallon Capital. Silberman said he voted against the sale. Silberman said he has learned more about the Mott Family fund's finances since filing his suit; but he said he is prevented from talking about many of the details due to a nondisclosure agreement entered into as part of the arbitration.
At last count, Irving Picard, the bankruptcy trustee in charge of recovering Madoff's clients' money, had recovered about $9 billion of the estimated $17.3 billion lost. Most of the recovered money came from investors who were paid fictitious profits by Madoff above the amount they invested. The trustee has sued about 1,000 people for approximately $100 billion. The defendants include financial firms UBS, HSBC and JPMorgan Chase and high-profile individuals such as the owners of the New York Mets and members of the Madoff family.
Contact Richard Halstead via e-mail at firstname.lastname@example.org ------ (c)2013 The Marin Independent Journal (Novato, Calif.) Visit The Marin Independent Journal (Novato, Calif.) at www.marinij.com Distributed by MCT Information Services