BLMIS was a Ponzi scheme. Cash was taken from “investors” in the fraud to provide “returns” and payouts to other customers. The sad truth is that any money withdrawn from the scheme was simply money that had been misappropriated (stolen) from other customers.

For a detailed FAQ on Ponzi Schemes, see also http://www.sec.gov/answers/ponzi.htm.

The United States Department of Justice for the Southern District of New York and the United States Marshals Service are overseeing those assets.

The mission of the SIPA Trustee in the BLMIS liquidation is to oversee the liquidation as directed by the law, to marshal assets stolen in this fraud and to assemble the largest Customer Fund and General Estate possible so that all BLMIS customers and creditors, as designated by the statute, can ultimately receive some compensation for their losses as a result of this unprecedented Ponzi scheme.

As of February 15, 2012, total recoveries of more than $9 billion by the SIPA Trustee equal more than half of the approximately $17.3 billion in principal estimated to have been lost in the fraud by those who submitted claims. While the SIPA Trustee cannot predict how much he will ultimately recover, our progress is encouraging. These recoveries already far exceed any prior restitution effort related to a Ponzi scheme, in terms of dollar value and percentage of stolen funds recovered.

Mr. Picard is not just the SIPA Trustee for BLMIS customers with allowed net equity claims. He is the SIPA Trustee for all BLMIS customers and creditors. His goal is to recover as much as possible to satisfy the maximum number of customer and general estate claims.

The first mandate of the SIPA Trustee is to make the customers of BLMIS with allowed claims financially “whole.” Under the statute, these customers have priority for distributions from the Customer Fund that is created to satisfy their claims. Once these customers have received funds in amounts equivalent to their deposits in BLMIS, minus any withdrawals, they are then on equal footing with those BLMIS customers who have already withdrawn amounts equal to – or greater than – their deposits.

Those who withdrew more than they put into BLMIS in good faith do not have an allowed claim or priority for distributions at this time, but they do have a general creditor claim for fraud. All good faith customers of BLMIS, and other creditors in the liquidation such as service providers and vendors, have general claims against the BLMIS General Estate.

Once the SIPA Trustee fully satisfies the net equity claims of BLMIS customers, the next step in the BLMIS liquidation is to allocate recoveries to the General Estate and to distribute those recoveries pro rata to general creditors in the order of priority established under the Bankruptcy Code. All good faith BLMIS customers who filed claims – whether their net equity customer claims were allowed or denied – are general creditors of the BLMIS estate under the auspices of the SIPA Trustee and do not need to file additional claims.

Every situation is different, so please consult with your tax advisor.

“Net equity” in this instance is the difference between BLMIS customers’ cash deposits and withdrawals. This time-tested method to determine losses in Ponzi schemes has been used many times before in similar cases and both the United States Bankruptcy Court for the Southern District of New York and the United States Court of Appeals for the Second Circuit have upheld it in this case as well.

Some BLMIS customers, over time, withdrew more than they had actually deposited. Because they got more money from BLMIS than they actually invested, they are often called “net winners.” Other BLMIS customers withdrew less than they had deposited or none at all. Because they got little or none of their money back, they are often called “net losers.”

Under the statute, BLMIS net losers have a priority position to receive pro rata distributions from the Customer Fund and must be made “whole” first. This is the only way to achieve a level of equality among defrauded BLMIS customers.

The SIPA Trustee will continue to pursue the return of monies received by BLMIS customers over and above their actual investment, for distribution to “net losers.” The SIPA Trustee understands that many “net winners” acted in good faith when they withdrew funds. Nevertheless, even if acting in good faith, BLMIS customers who withdrew more than they deposited are still in possession of funds that belong to other BLMIS customers and they must, if possible, return excess funds for distribution to those who lost all or a portion of their original BLMIS deposits.

As noted elsewhere on this website, the SIPA Trustee also understands that some of the good faith “net winners” have extenuating circumstances, and that returning all or even some of the excess funds which they withdrew may represent a hardship. The SIPA Trustee, in these cases, has discretion to dismiss actions seeking excess funds, and he has exercised this discretion.

Certain parties have disputed the SIPA Trustee’s “cash in, cash out” formula, maintaining that BLMIS customers are entitled to full restitution of the fictitious balances shown on the BLMIS November 2008 statements, versus the amounts indicated by the “net equity” methodology. These parties are pursuing legal actions that are not only without any precedent or basis in law, but also are reducing and delaying distributions, especially to the hardest-hit of the BLMIS customers.

The Second Circuit Court of Appeals recently upheld the decision of Judge Burton R. Lifland of the United States Bankruptcy Court for the Southern District of New York, which affirmed the SIPA Trustee’s determination that in this liquidation, allowable customer claims, or “net equity” claims, are governed by the Net Investment Method. Several parties sought to have the Second Circuit reconsider its opinion, but that request was denied.

As of February 6, 2012, three parties petitioned for Writs of Certiorari with the Supreme Court of the United States, requesting further review of the net equity decision.

The SIPA Trustee’s definition of net equity seeks to compensate BLMIS customers for their actual losses and to distribute recovered funds on that basis. The SIPA Trustee’s net equity definition is the only one accepted under SIPA, is consistent with decades of legal precedent and, in the Madoff case, has been upheld by the United States Bankruptcy Court for the Southern District of New York and United States Court of Appeals for the Second Circuit.

As of February 6, 2012, three parties petitioned for Writs of Certiorari with the Supreme Court of the United States, requesting further review of the net equity decision.

If the Petitions are granted and the SIPA Trustee’s methodology is found to be incorrect, the SIPA Trustee will be bound by that order and will apply it retroactively to all previously determined customer claims in accordance with the Court’s order.

While the SIPA Trustee is confident that his position on net equity will prevail, by law, he must take a “worst case” approach and calculate payouts and reserves as if appellants had prevailed. This means that BLMIS customer with allowed claims will receive much smaller pro rata distributions while funds are held in reserve until all appeals are resolved.

Once a final, unappealable decision is reached on net equity, there are additional unresolved matters that will then require determination, including constant dollar, the time value of money or interest. All of these matters will be heard and determined by the courts and, until resolved, require reserves.

The records kept by BLMIS were quite extensive and date back for decades. However, under New York State law, in most cases, the SIPA Trustee can only pursue customers who withdrew more than they deposited, and the excess withdrawals must have occurred in the six years prior to the discovery of the fraud, or, in this case, since December 11, 2002. However, any deposits prior to 2002 will be included in the determination of each customer’s net equity.

For information concerning the criminal cases arising out of the Madoff Ponzi scheme, please consult the website of the United States Attorney’s Office for the Southern District of New York at www.justice.gov.

The Securities Investor Protection Act (SIPA) is the law that governs liquidation proceedings of failed brokerage firms. While the Securities Investor Protection Corporation (SIPC) is the supervising organization for SIPA, it is not the securities industry equivalent of the Federal Deposit Insurance Corporation (FDIC).

When a brokerage firm is closed due to bankruptcy or other financial difficulties and customer assets are missing, SIPC steps in as quickly as possible and works with the court-appointed SIPA Trustee to return customers’ cash or other existing assets. SIPC has the authority to administer funds to customers of failed brokerage firms as an advance against recovered assets. The current limit on any SIPC-administered advance is $500,000. SIPC, which is funded by brokerage firms, is neither a government agency nor a regulatory authority.

Bernard Madoff operated a Ponzi scheme through BLMIS. The essence of a Ponzi scheme is that customer requests for withdrawals from their accounts are satisfied by money taken from other customers. As a result, the only recoveries possible are customers’ cash deposits.

In the BLMIS Ponzi scheme, customers who withdrew money from their Madoff investment accounts were not withdrawing actual returns from actual investments; it was money stolen from other customers. There were no securities traded and the securities positions shown on the BLMIS statements were fictitious.

SIPA provides some protection to restore actual cash and securities lost in brokerage liquidations, but there isn’t any industry or government agency in the U.S. that “insures” against losses on fictitious profits in a Ponzi scheme.

For more information about SIPC, visit http://www.sipc.org.

Under SIPA, SIPC specifies and the District Court appoints a SIPA Trustee whose job is to oversee the liquidation as directed by the law, to marshal assets stolen in the fraud and to assemble the largest Customer Fund and General Estate possible so that all BLMIS customers and creditors, as designated by the statute, can ultimately receive some compensation for their losses as a result of the unprecedented Madoff Ponzi scheme.

SIPC is also authorized to administer funds to customers of failed brokerage firms as an advance against recovered assets. In this case, SIPC has advanced to the court-appointed SIPA Trustee approximately $800 million in funds to distribute to BLMIS customers with allowed claims.

In addition, SIPC advanced monies from its administrative fund for the work of the SIPA Trustee, his counsel and consultants as well as for the costs of administrating the liquidation. SIPC’s funds are raised by assessing its members in the securities industry.

All monies recovered by the SIPA Trustee for the Customer Fund will ultimately be distributed to BLMIS customers with allowed claims.

At the time the liquidation commenced, the SIPA Trustee and SIPC elected to pay BLMIS customers the maximum advance of $500,000 against allowed claims.

The SIPA Trustee was required by law to file most of these lawsuits by the second anniversary of the fraud’s discovery, which was December 11, 2010. Litigation against any Madoff customer is still considered the last resort, as the SIPA Trustee and his counsel prefer to work with each customer or their representatives, review their unique circumstances and arrive at an amicable resolution.

If extenuating financial or personal difficulties exist, the SIPA Trustee continues to urge those who believe they qualify to apply for the Hardship Program. The SIPA Trustee has also extended the time for applicants to answer or otherwise respond to avoidance action complaints while their hardship applications are pending.

In addition to dismissing cases as a result of demonstrated hardship, the SIPA Trustee has also not pursued cases in which the potential funds to be gathered doesn’t justify the effort required.

Finally, the SIPA Trustee has sent a last letter to avoidance action recipients who have not responded and are technically in default, giving them one last chance to begin negotiations.