Irving H. Picard to Serve as Department of Justice Special Master for Returning Forfeited Funds to Victims

NEW YORK—Carl J. Shapiro and various related people and entities have agreed to forfeit $625 million to the United States, all of which will be made available to the victims of the fraudulent investment advisory business which was owned and operated by Bernard L. Madoff. The distribution of funds to victims will be administered by Irving H. Picard in his dual capacities as the newly-appointed special master to assist the department in connection with the victim remission proceedings, and as the court-appointed trustee overseeing the liquidation of Bernard L. Madoff Investment Securities LLC, under the Securities Investor Protection Act. The agreement was submitted to and approved by U.S. District Judge Thomas P. Griesa today.
The announcement was made by Preet Bharara, U.S. Attorney for the Southern District of New York; Orlan Johnson, Chairman of the Securities Investor Protection Corporation (SIPC); Janice K. Fedarcyk, Assistant Director-in-Charge of the New York Field Division of the FBI; and Charles R. Pine, the Special Agent-in-Charge of the New York Field Office of the Internal Revenue Service (IRS), Criminal Investigation Division, announced today that
According to the stipulation and order of settlement and accompanying civil forfeiture complaint filed in Manhattan federal court earlier today, the investment advisory business of Bernard L. Madoff Investment Securities LLC (BLMIS) was operated from at least as early as the 1980s as a massive Ponzi scheme, defrauding investors of billions of dollars. Rather than use client funds to invest in securities, as promised, BLMIS diverted those funds to (a) pay other clients’ redemption requests; (b) fund transactions to disguise BLMIS’s fraud; and (c) enrich Madoff, his family, and his associates. In order to support the lie that BLMIS was operating a legitimate investment advisory business, BLMIS created and disseminated fictitious account statements that, among other things, showed trades that never actually took place. During the course of the fraud, Madoff’s clients lost approximately $20 billion in funds they invested with BLMIS.
Since at least the late 1960s, Carl J. Shapiro was an investor in BLMIS, holding an account in his own name and controlling accounts held by various related individuals and entities. Over the course of his approximately 40-year relationship with Madoff and BLMIS, Shapiro invested hundreds of millions of dollars into his BLMIS accounts, but withdrew hundreds of millions more. When Madoff was arrested in December 2008 and his fraud was revealed, it became clear that Shapiro—like all of BLMIS’s investors who withdrew more money than they invested—had profited at the expense of more recent BLMIS investors.
In order to resolve any potential civil claims by the government against Shapiro and his family, the Shapiro family has agreed to forfeit $625 million to the government—an amount in excess of Carl J. Shapiro and his wife’s current net worth, as well as in excess of the fictitious profits that Shapiro and his wife took out of BLMIS. The settlement contains no finding or admission of fault against Shapiro or his family; the settlement does not, however, release any party from criminal liability.
Simultaneously with the announcement of today’s historic settlement, U.S. Attorney Bharara announced that the department has appointed Irving H. Picard as special master to assist in identifying eligible victims, verifying their losses, and distributing the forfeited funds in accordance with department regulations governing remission or mitigation of forfeitures. For approximately two years, Picard has served as the court-appointed trustee for BLMIS under the Securities Investment Protection Act (SIPA). Under the terms of today’s settlement, and a related settlement submitted to the U.S. Bankruptcy Court for the Southern District of New York, Picard will administer $550 million of the funds being returned to investors by the Shapiro family through the SIPA liquidation proceedings, and the remaining $75 million through the department’s remission or mitigation process.
“For almost 40 years, Carl Shapiro invested hundreds of millions of dollars with Bernie Madoff but withdrew far more,” said U.S. Attorney Preet Bharara. “By requiring him to forfeit this money—more than he is currently worth—the government and the SIPA Trustee have sent an important message: those who profited as a result of Bernard Madoff’s fraud should disgorge those profits, which are rightfully other people’s money. We will continue to work tirelessly with our partners from SIPC, the FBI, and the IRS, to track down any and all proceeds of Madoff’s Ponzi scheme and return them to their rightful owners. And, to be clear, the criminal and civil forfeiture investigations relating to the Madoff fraud are very much ongoing.”
“The trustee used the legal tools made available under the Bankruptcy Code and SIPA to benefit the victims here,” said SIPC Board Chairman Johnson. “The Madoff case is now entering a new phase. I hope this marks the beginning of a period that will see many such settlements.”
“As we approach the two-year anniversary of the Bernard Madoff arrest, this settlement represents a significant step in the restitution of retirements, pensions, and university endowments that were robbed with blatant disregard for the law,” said FBI Assistant Director-in-Charge Fedarcyk. “It takes a special depravity to victimize so many people so severely. The investigation of prodigious fraud, like that of Madoff, remains one of the FBI’s top priorities. From robbers to fraudsters, the FBI will continue to bring to justice crooks who steal.”
“Investment fraud is never a victimless crime,” said IRS Criminal Investigation Special Agent-in-Charge Pine. “Financial distress left in the wake of a crumbling investment scheme leaves victims in financial ruins and feeling betrayed by individuals they trusted would help them make a better life. The victims in the case can know that IRS Criminal Investigation has resources devoted to assisting the U.S. Attorney to hold the perpetrators accountable, and to help re-coop some of their stolen money.”
U.S. Attorney Bharara praised the work of SIPC, the SIPA Trustee, the FBI, the IRS, the Department of Labor’s Employee Benefits Security Administration and Office of the Inspector General, the Department of Justice’s Criminal Division’s Asset Forfeiture and Money Laundering Section, and the U.S. Marshals Service. U.S. Attorney Bharara also thanked the Securities and Exchange Commission for their assistance.
This case was brought in coordination with President Barack Obama’s Financial Fraud Enforcement Task Force, on which U.S. Attorney Bharara serves as a co-chair of the Securities and Commodities Fraud Working Group. President Obama established the interagency Financial Fraud Enforcement Task Force to wage an aggressive, coordinated, and proactive effort to investigate and prosecute financial crimes. The task force includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general, and state and local law enforcement who, working together, bring to bear a powerful array of criminal and civil enforcement resources. The task force is working to improve efforts across the federal executive branch, and with state and local partners, to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets, and recover proceeds for victims of financial crimes.
Assistant U.S. Attorneys Lisa A. Baroni, Julian J. Moore, Barbara A. Ward, and Matthew L. Schwartz are in charge of the case.

Investors who argue that fake profit in the Bernard Madoff fraud should be included in their repayment claims must wait to see if the judge overseeing the liquidation of Madoff’s defunct business will side with them.

U.S. Bankruptcy Judge Burton Lifland in New York didn’t issue a ruling yesterday after a four-hour hearing in which he listened to arguments from investors and lawyers.

Lifland will determine how much money, if any, victims may get from the industry-financed Securities Investor Protection Corp., which must repay as much as $500,000 for each qualifying claim.

“There are very complex issues here,” Lifland said at the end of the hearing. “No matter how I come down and rule, it’s going to be unpalatable to some degree to one party or another.”

Lifland didn’t say when he would make a decision.

The liquidation of New York-based Bernard L. Madoff Investment Securities LLC is the biggest such case undertaken by SIPC, court records show.

The case is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC, 08-01789, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Thousands of customers have objected to trustee Irving Picard’s methodology, arguing he is wrongfully calculating claims based on their cash deposits minus withdrawals instead of using amounts listed on Madoff’s final account statements.

Picard, hired by SIPC to repay victims of the $65 billion fraud, has said that using account statements to set claims would let the con man decide who gets what, and include fake profit from trades that didn’t really happen.

‘Changed Procedure’

Victims argue that SIPC, which was chartered by the U.S. in 1970 to wind down failed brokerages, is required to set claims based on customers’ legitimate expectations from their accounts. They say Picard changed the procedure to avoid massive payouts.

“They’re wrong — they’re wrong about their positions,” Picard’s lawyer, David Sheehan, told Lifland. “The statute is clear. The legislative history is clear.”

Sheehan told the judge that “the last customer statement, being a concoction of a fraudster, cannot be something upon which you rely. No one in their right mind would suggest you should use the last statement.”

“As soon as we give money to someone who took all their money out, we’re taking money from another customer — stolen money,” Sheehan said.

Sheehan said the claims must be set fairly to ensure no victim gets more than a fair share of money recovered by Picard through lawsuits, which he estimated could eventually be close to $10 billion.

Laughs, Murmurs

Lifland threatened to remove some observers in the packed courtroom after Picard’s lawyer was twice interrupted by laughing and murmurs.

“I’m not swayed by your reactions,” Lifland said. “Let’s have some decorum in the courtroom.”

The U.S. Securities and Exchange Commission in December told Lifland it generally supported Picard’s “cash-in, cash- out” method. The agency said it would be fairer to victims if Picard adjusted the claims for inflation.

“Customer claims should be partly principal and partly earnings,” the agency’s lawyer, Katherine Gresham, told the judge yesterday. “The commission agrees with the trustee that customer claims for net equity should not be based on the securities positions on the final account statements.”

A SIPC payment “is not insurance the way the FDIC insures bank deposits,” Gresham said.

Customer claims in the case will also determine what share victims receive from lawsuits filed by Picard against Madoff’s biggest investors and beneficiaries, including hedge funds and the con man’s wife, Ruth. About a dozen such cases seek the return of about $15 billion in allegedly fake profit.

Owing Money

Under Picard’s calculation, some victims may end up owing money if they took out more than they put in. Last week, the family of deceased New York real estate magnate Norman F. Levy agreed to pay Picard $220 million for victims to settle claims the family withdrew more than it deposited with Madoff.

Helen Chaitman, a victim who is representing other customers in the case, has said Picard’s method is improper and is slowing down the liquidation process by requiring in-depth analysis of customer records to set claims

Chaitman, who testified Dec. 9 in Washington at a congressional subcommittee hearing about the case, earlier sued Picard and accused him of representing the interests of the brokerage industry instead of those of victims.

“I know the people in this room feel they’ve been wronged terribly by Madoff, then the regulatory agencies, and now Mr. Picard,” Sheehan said in court yesterday. “But this is a Ponzi scheme. It’s a zero sum game. I know no one in this room wants to accept that.”

Left Destitute

Karen Wagner, a lawyer for Madoff customer Sterling Equities Inc., told the judge that “many customers who have been left destitute by this fraud will receive nothing under Mr. Picard’s definition of net equity.”

Josephine Wang, an SIPC lawyer, said in court yesterday that “we are not questioning the innocence of the victims in this case. We have great sympathy for them, but there are certain presumptions that are made under the law and if they choose to rely on the bad acts of Madoff then they have to accept the consequences.”

“Both the SEC and SIPC have had their motives questioned in this case, that our intent is not to enforce the law,” Wang said. “That is not only absolutely false, truly it goes beyond the pale.”

Madoff, 71, pleaded guilty in March and was sentenced on June 29 to 150 years in prison for using money from new clients to pay earlier investors in the world’s biggest Ponzi scheme.

Patricia Morgen, 62, of Oakland, California pleaded guilty in federal court in San Francisco yesterday to wire fraud, mail fraud and money laundering, United States Attorney Joseph P. Russoniello announced December 17, 2009.

In his announcement, U.S. Attorney Russoniello restated the Department of Justice’s top priority to vigorously prosecute individuals who commit mortgage fraud and other financial crimes.

In pleading guilty, Morgen admitted that the company she founded and controlled, Chicago Development and Planning (CDP) engaged in two fraudulent schemes: (1) a Ponzi scheme that defrauded more than 400 individual investors by falsely promising that their investment funds would be used to acquire, renovate, and re-sell real estate; and (2) a mortgage fraud scheme that defrauded a mortgage broker and various mortgage lenders by use of loan applications with fraudulent income and asset statements. Morgen admitted that the loss for the two schemes exceeded $8 million. In the plea agreement, Morgen agreed to make restitution in the amount of no less than $8,439,086.

The Securities and Exchange Commission (SEC) began investigating Chicago Development and Planning in 2004, and ultimately obtained a default judgment against Morgen when she failed to appear in any of the civil proceedings. In pleading guilty, Morgen admitted that when she learned of the SEC’s investigation, she instructed employees to destroy documents and then fled to Mexico to avoid federal authorities. Morgen also admitted that she instructed an employee to contact a mortgage broker who had worked on CDP real estate acquisitions in an attempt to convince the mortgage broker not to provide documents to the SEC.

On Sept. 2, 2009, Morgen’s co-defendant, Michael Ware, pled guilty to similar charges involving Chicago Development and Planning’s mortgage fraud scheme.

“This case shows that the appearance of success can be a mask for a tangled financial web of lies,” said Scott O’Brian, Special Agent in Charge, IRS-Criminal Investigation, and Oakland Field office. “Ponzi schemes can thrive for a time on false claims about how the money is being invested and where the returns are coming from. But that time is gone, and as this case shows, it’s time for those responsible to face judgment.”

Morgen was indicted by a federal Grand Jury on Nov. 20, 2008. She was charged with 11 counts of mail and wire fraud, as well as a single count of money laundering. Under the plea agreement, Morgen pled guilty to two counts of mail fraud, two counts of wire fraud, and one count of money laundering.

Morgen is currently in the custody of the Bureau of Prisons. Her sentencing is scheduled for April 7, 2010, before Judge Charles R. Breyer in San Francisco. The maximum statutory penalty for mail and wire fraud is 30 years. The maximum statutory penalty for money laundering is 10 years.