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JPMorgan, Bank of NY Mellon to Return Madoff Money

Jan 30, 2009 | Parker Waichman LLP

Two banks that recently discovered more than $500 million in accounts belonging to Bernard Madoff will be turning those funds over to the trustee charged with liquidating the accused Ponzi schemer's assets.   According to a report in The New York Times, JPMorgan Chase located $301.4 million in one of Madoff's business accounts, while Bank of New York Mellon discovered $233,500,000 in three accounts.

The 70-year-old Madoff was arrested on one count of securities fraud on December 11.  Madoff - once a chairman of the Nasdaq stock exchange - is the founder and primary owner of Bernard L. Madoff Investment Securities LLC. The firm is primarily known for its business in market-making, or serving as the middleman between buyers and sellers of shares. However, Madoff also oversaw an investment-advisory business that managed money for high-net-worth individuals, hedge funds and other institutions.

According to the FBI complaint against Madoff, that business was largely a Ponzi scheme.  The FBI said Madoff  “deceived investors by operating a securities business in which he traded and lost investor money, and then paid certain investors purported returns on investment with the principal received from other, different investors, which resulted in losses of approximately billions of dollars.” Madoff reportedly told employees that his fraud could cost investors as much as $50 billion.

As the investigation into Madoff's investment advisory business has grown, it has become apparent that his Ponzi scheme may have gone on for decades.  Earlier this month, a spokesperson for the Financial Industry Regulatory Authority (FINRA) - the industry-run regulator for brokerages -  told Reuters that it’s investigators have not been able to find records of any trades Madoff’s investment advisory business might have made.  Unless Madoff was initiating trades through other brokerages - something Reuters said wasn’t likely - he wasn’t making trades at all.

The impact of Madoff's alleged fraud has been felt far and wide. Many wealthy investors, including Philadelphia Eagles owner Norman Braman, New York Mets owner Fred Wilpon and J. Ezra Merkin, the chairman of GMAC Financial Services, were caught up in the scandal.  Several investment-management firms, including Tremont Capital Management and Fairfield Greenwich Advisors, which were heavily invested in Madoff’s funds, lost millions for their clients. Banks around the globe, including the Royal Bank of Scotland, France’s largest bank, BNP Paribas, Britain’s HSBC Holding PLC and Spain’s Santander have also been hit hard, as have many charities.

After Madoff's arrest, a federal judge ordered that his business be liquidated under the jurisdiction of a bankruptcy court and assigned a  trustee to oversee that process.   That trustee has the job of locating Madoff company and customer funds so investors can recoup some of what they lost.

Most experts on these types of  liquidations have not been optimistic that investors would see much money when all is said in done.  Reportedly, similar liquidations have recovered about 10 cents on the dollar for defrauded investors.  So news of the funds located by JPMorgan and Bank of New York Mellon is heartening, although it still only represents a fractions of what was lost due to Madoff's scheme.

In a stipulation filed with the court, the trustee and the banks have agreed that the money will be wired to the special court account set up for the funds on or before Feb. 6. A hearing is slated for Feb. 4 before Bankruptcy Court Judge Burton Lifland.  This is actually the second time Bank of New York Mellon has arranged such a transfer.  In December, it transferred another $29 million of Madoff's funds to the trustee.

The trustee is handling the liquidation for the Securities Investor Protection Corp.  Congress created the SIPC in 1970 to protect investors when a brokerage firm fails and cash and securities are missing from accounts. According to the SIPC website, funds from its reserve are available to satisfy the remaining claims of each customer up to a maximum of $500,000. This figure includes a maximum of $100,000 on claims for cash. Recovered funds are used to pay investors whose claims exceed SIPC's protection limit of $500,000. SIPC often draws down its reserve to aid investors.

The SIPC sent out 8,000 claim forms to Madoff investors who might be eligible for recovery in early January.  Unfortunately, third-party investors - those whose Madoff investments were made through other entities -  might not be eligible for the full SIPC benefit.  Those investors could choose to sue the third party, and some hedge funds have already been named in such lawsuits.

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