The Securities and Exchange Commission is taking inconsistent positions on whether victims of a Ponzi scheme like Bernard L. Madoff Investment Securities Inc. should have their claims increased to reflect how long they were investors before the fraud blew up.
In support of an opinion last week from the U.S. Court of Appeals in a Ponzi scheme case called Commodity Futures Trading Commission v. Walsh, the SEC took the position there should be no increase to account for inflation or the time-value of money. The agency argued that victims' claims should be limited to the amount invested less the amount taken out.
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In the Madoff liquidation, the SEC filed papers arguing there should be an inflation factor in the determination of the size of a victim's claim.
The April 3 opinion from the Second Circuit appeals court favors Madoff trustee Irving Picard who believes there should be no interest or inflation factor, regardless of whether the victim was an investor for 20 years or one month.
Last week's appeals court decision involved a Ponzi scheme perpetrated by Stephen Walsh and Paul Greenwood. The federal court receiver brought lawsuits and collected $815 million toward victims' claims aggregating $959 million. The receiver proposed that everyone receive the same percentage distribution. The SEC agreed.
Some customers disagreed, contending there should be an interest factor inflating the claims of long-term investors. Other customers believed more of the money should be given to victims who thought they were making less speculative investments.
The 35-page opinion by Circuit Judge Amalya Kearse came down on the side of the receiver, saying he didn't abuse his discretion by employing no interest factor.
The SEC argued that treating everyone the same, without an interest factor, was "the best and fairest approach." If the receiver eventually were to pay everyone 100 percent, then, the agency said, adjusting claims to reflect the time-value of money might be appropriate.
In papers filed with the Madoff bankruptcy court in December, the SEC said that an "inflation adjustment should provide a more accurate calculation of the real-dollar value of the customer's net investment." SEC spokeswoman Christina D'Amico didn't respond to a request for comment on whether the agency is taking inconsistent positions.
The SEC wasn't prepared to say whether inflation adjustment should be added to the calculation of Madoff claims. The agency said claims should be adjusted "provided that the benefits of doing so outweigh the costs." At the time, the SEC said it didn't have the "data necessary to make an informed evaluation of the benefits or the costs" and thus "has not made any determination as to whether or not an inflation adjustment should be made."
In the Madoff liquidation, the bankruptcy judge is currently scheduled to hold a hearing in July to decide if customers' claims will be increased with an interest factor. Customers are in the process of investigating facts pertinent to the July hearing.
The Walsh decision arguably supports the Madoff trustee. Near the end, Kearse said there is no "authority that supports the proposition that an inflation adjustment is required as a matter of law when there is to be a distribution of assets to a group of similarly situated victims and those assets are insufficient to make all of the victims whole."
The Madoff firm began liquidating in December 2008, with appointment of a trustee under the Securities Investor Protection Act. Bernard Madoff individually went into an involuntary Chapter 7 liquidation in April 2009. His bankruptcy case was consolidated with the firm's liquidation. Madoff is serving a 150-year prison sentence following a guilty plea.
Last week's opinion was Commodity Futures Trading Commission v. Walsh, 11-1516, 2nd U.S. Circuit Court of Appeals (Manhattan).