By Pam Martens: August 18, 2014

On May 5, 2014, Irving Picard, the court-appointed trustee in charge of finding and distributing Madoff’s swindled funds to investors released this statement in a press release announcing the fourth interim distribution of funds to victims: “…1,129 accounts will be fully satisfied following the fourth interim distribution. All allowed claims totaling $925,000 or less will be fully satisfied after the distribution.”

Just eight days later, Richard Breeden, the Special Master that’s working on behalf of the U.S. Department of Justice to distribute a separate pool of funds to Madoff’s victims reported that more than 36,000 claimants have filed documents with his office indicating that they haven’t yet received a dime of restitution. Yes, 36,000 people from all over the globe.

That’s bad enough but the story goes downhill from there. Almost six years from the date that Bernard Madoff turned himself in as the largest Ponzi fraudster in the history of finance, the U.S. Department of Justice is still scratching its head over just how much money Madoff actually ripped off from investors and puzzling over how to divvy up its inadequate pot of money.

We know for certain that the Justice Department was stunned to learn that 36,000 claimants said they hadn’t received a dime because in a November 18, 2013 press release, Breeden indicated that he was going to begin accepting claims from “approximately 11,000 investors whose assets came into Madoff Securities indirectly through feeder funds, investment partnerships, bank commingled funds, family trusts or other pooled investment accounts. As a result, we expect approximately 12,000 direct and indirect investors will be eligible for a recovery…” Instead of receiving 11,000 claim forms, Breeden received 51,700 with 36,000 of those reporting zero restitution.

The Justice Department’s idea was to help Madoff’s victims who weren’t eligible under the pool of funds administered by the court-appointed trustee, Irving Picard. The Securities Investor Protection Act, which governs Picard’s distributions, requires that the customer must have held a direct account in his/her own name at a broker-dealer that was a member of SIPC (Securities Investor Protection Corporation) to be eligible to make a claim when the firm fails. Because many of Madoff’s victims gave their money to hedge funds, banks and funds of funds who co-mingled the money with many other investors and then placed the money with Madoff under the fund’s name, those investors to a large degree have seen little restitution.

One primary reason their claims have been denied by Picard revolves around the decision, upheld by the court, to return only original principal deposited – not fictitious profits shown on the statement. Since there was not going to be adequate funds to pay fictitious profits, this seemed like a good idea at the time. The problems emerged when a pooled fund account was deemed – on a total account basis – to have withdrawn more principal than deposited; even when thousands of investors in the fund may have never withdrawn a dime, if the fund account as a whole had withdrawn more principal than it had deposited on behalf of all investors, the claim was denied as it was deemed a net winner.

Picard had previously approved $2.9 billion in claims of Tremont-managed funds which held accounts with Madoff’s broker-dealer. (Picard had also reached a settlement with Tremont where it agreed to pay approximately $1 billion because Picard believed it had ignored warnings that Madoff might be running a Ponzi scheme.) Approximately $1.2 billion of that claim has been distributed by Picard but it’s sitting in an escrow agent account due to court challenges by some Tremont investors.

Breeden, working on behalf of the Justice Department, has adopted a different formula for making distributions. For investors whose money was held by a hedge fund, bank, feeder fund or co-mingled family account, it will look at the individual’s claim solely, not whether the account collectively had withdrawn more principal than it had deposited. Unfortunately, there is not going to be enough money to make people anywhere near whole.

The monies the Justice Department has to distribute came from forfeitures of persons involved in the Madoff fraud. Right now, Breedon has only $4 billion to dispurse. The Justice Department would have had a pot of $9 billion in total funds but it previously turned over $5 billion of what it had collected to the Madoff bankruptcy estate to be used to pay creditors.

According to the May 13, 2014 press release from Breeden, this is the breakdown of claims received: “Based on preliminary review, approximately 77.5% of claims were submitted by individuals reporting losses of up to $500,000, while approximately 9.5% of claimants reported losing from $500,000 to $1 million. Approximately 13% of victims reported losses in excess of $1 million.”

Applying those percentages to just the 36,000 claimants who have not received any funds thus far, and using the low end calculation of the dollar losses, the Justice Department is looking at a ballpark of $16 billion in claims for just those who have yet to receive a dime of restitution – four times what it has on hand.

Equally disturbing, Breeden indicated on May 13 that his office had received “more than 43,500 claims from individuals who did not file a claim” with Picard and said the claims came from 119 countries.

If you add the 43,500 claims received by Breeden from brand new filers together with the 16,519 claims previously filed with Picard, we are looking at 60,019 people stating that they were victims of Madoff’s fraud. Of that 60,019, there are 36,000 people who have not received a dime; 1,129 who have been made completely whole by Picard up to an amount of $925,000. And out of the 60,019, almost six years after Madoff turned himself in, only 2,518 claims have been approved for payment.

When the news of the Madoff fraud first gained media attention around the world in December of 2008, there was widespread criticism of the structural failure of the U.S. financial regulatory system, particularly the SEC – which had not only ignored detailed, written warnings from professionals like Harry Markopolos and others that Madoff was running a Ponzi scheme but the SEC had actually closed investigations into Madoff’s operations and then shredded the evidence it had collected.

The only consistent message here is that the U.S. financial regulatory structure is just as bad at delivering fraud restitution as it is at detecting fraud.

It’s time for another Senate Committee to begin to function like Carl Levin’s Permanent Subcommittee on Investigations (already buried under exponentially accelerating Wall Street fraud investigations) and hold new hearings on the Madoff fraud.

Key questions for this hearing are as follows: why did it take over five years to learn that 36,000 Madoff claimants have not received a dime of restitution. Why was JPMorgan Chase, which was charged with two felonies for aiding and abetting the Madoff fraud, given a deferred prosecution agreement and allowed to settle for chump change. It was agreed by both the Justice Department and Picard that JPMorgan Chase (and/or its predecessor banks) stood at the very center of the fraud as Madoff’s key business bank for more than 20 years watching hundreds of billions of dollars being washed between accounts. And yet, this is what JPMorgan paid in settlement funds: $1.7 billion to the U.S. Justice Department to compensate victims of the fraud; another $543 million to Picard’s trustee fund to compensate victims; and a $350 million fine to the regulator of national banks, the Office of the Comptroller of the Currency.

That settlement with JPMorgan came on January 7, 2014.  The Justice Department did not release the news revealing that it had a paltry pot of money to pay claims reaching somewhere between $16 billion and $40 billion until four months after that settlement with JPMorgan.

And finally, there is the matter of the Justice Department quashing the subpoena by one of JPMorgan’s regulators who had demanded information from inside JPMorgan on what its employees knew about the Madoff fraud.

When the highest law enforcement in the land quashes a subpoena from a Federal regulator while deferring felony prosecutions and settling on the cheap with a serial miscreant – leaving tens of thousands of Madoff victims destitute for six years – the public and defrauded investors around the world need answers.

To do anything less sends a chilling message around the globe that the U.S. is not a safe place to invest.