Robbing Peter to Pay Paul: Irving Picard’s Quest to Repay Bernie Madoff’s Victims

Author: Dan Stroh, Associate Member, University of Cincinnati Law Review

Charles Ponzi did not intend to have his name become synonymous with financial fraud; he intended to get rich quickly. While he was not the first to perpetrate such a scheme, Ponzi’s name is attached to a type of fraud in which a fund pays its first investors with the money contributed by later investors—a Ponzi scheme. In 2008, Bernie Madoff was discovered to have been running a Ponzi scheme with investments estimated at $17.5 billion[1] and claimed returns in excess of $65 billion.[2] While Ponzi’s name is still mentioned frequently, many people now view Madoff as the face of Ponzi schemes due to his decades-long run as a famous investment professional all while never actually investing client funds.

When Madoff’s scheme unraveled, Irving Picard was assigned as trustee for Bernard L. Madoff Investment Securities LLC under the Securities Investor Protection Act (SIPA) and was given the task of attempting to recover as much money as possible to repay the initial investments of Madoff clients.[3] Six years later, the victims of Madoff’s fraud are still seeking repayment of their initial investments.[4] Picard has successfully recovered approximately 60% of the stolen assets to distribute to victims, but he continues to seek more.[5] Recently, the Second Circuit placed a major obstacle in his path when it determined that investors who withdrew more from their accounts than they initially invested were protected by the stockbroker defense in § 546(e) of the Bankruptcy Code.[6] Picard argued that these investors profited from Madoff’s scheme and whether they knew of the scheme or not, the profits they enjoyed should be shared by all of the defrauded investors.[7] On March 17, 2015 he filed a petition for certiorari with the Supreme Court, which has the potential to increase the amount of recovered assets by at least $2 billion and possibly up to $4 billion. With the holders of these funds currently protected by the “stockbroker defense” under the Second Circuit’s ruling,[8] Picard hopes that the Supreme Court will take the case and rule that this defense should only apply when actual securities are involved, not fictitious ones as is the case with Ponzi schemes. While some see the efforts of Picard as simply robbing Peter to pay Paul,[9] the return of these funds would allow for all defrauded investors to be treated equally and fairly without conveying benefits on those who were lucky enough to withdraw their money from Madoff’s Ponzi scheme first.

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Gaming the System: Are Ponzi Schemers Receiving Proper Criminal Sentences?

Author: Collin L. Ryan, Associate Member, University of Cincinnati Law Review

Ponzi schemes have existed for many years and their internal structure is well understood. Schemers solicit funds from individuals as “investments,” but keep the money themselves and pay “returns” to those investors from additional funds that are received from other new investors.[1] Consequently, the “returns” paid out attract more new investors to invest in the scheme, whose funds are then used to pay out more false “returns” to current investors, thus perpetuating the scheme. The fundamental component of this scheme is the pay out of fake returns. Without these payouts, the scheme would not attract new investors and would not grow and continue to profit the schemer.

Should the sheer act of paying out false “returns” to investors—an essential element of the scheme itself—allow operators of a Ponzi scheme to receive shortened lengths of criminal sentences? While some circuits do not allow fraudulent returns to mitigate sentencing lengths, the Sixth Circuit Court of Appeals recently held that, for purposes of calculating the range of criminal sentencing, the money paid back to a Ponzi scheme’s investors as “returns” on their investments offsets the victims’ total loss from fraud, and thus automatically lessens the length of criminal sentencing.[2]

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