Special Master Richard C. Breeden

FALL UPDATE 2014

from the Special Master


Last May, MVF announced that as of April 30, 2014, it had received more than 51,700 claims from persons in 119 countries. Those claims reported aggregate net investment losses of approximately $40 billion in the Madoff fraud. These numbers were only preliminary, as they did not include claims postmarked by April 30 but received later.

Updated Claims Total.   Perhaps not surprisingly due to the complex documentation that many claimants needed to assemble, many claims were filed at the very last moment. As a result, an avalanche of mail containing claims postmarked in the days or hours before the claims deadline continued to arrive at MVF for several weeks after the deadline. As a result, MVF ended up with a total of 63,553 claims covering losses of $76.654 billion. Of the total, 21,822 claims are from U.S. residents, while 41,731 claims are from foreign nationals. The last minute surge in claims nearly doubled the aggregate dollar value of claimed net investment losses MVF had previously received.

U.S. residents filed claims covering $30.7 billion in investment losses, while foreign nationals submitted claims covering losses of just under $46 billion. It is important to note that these numbers are "raw" data, or exactly what arrived in the mail. Once MVF reviews the raw data, the number and dollar value of claims will decline as ineligible and duplicate claims are weeded out, and as overstated claims are reduced in size. Nonetheless, the surge of claims at the end of the filing period reinforced the fact that the crimes committed at Madoff Securities caused historically unprecedented losses to individuals around the world.

Recent Activities.   Prior to the claims deadline, most of MVF's focus was on helping individuals understand the claims process and what records they needed to file. With the expiration of the filing period, MVF's efforts have shifted to the much more difficult process of evaluating which claims are potentially eligible, and in what amounts. Ultimately MVF has to be able to recommend final action to the Department of Justice on all 63,553 claims.

MVF's initial work was to scan every claim and enter all of its data into our claims database. Over 3.3 million pages of documents, most of which were not previously submitted in the bankruptcy proceedings, were assembled into a comprehensive database. As a result, by mid-summer MVF's staff have been engaged entirely in reviewing the specifics of claims.

The detailed review of each claim often occurs through multiple stages. Among other things, MVF must verify the identity of the claimant and the claimant's eligibility to recover under MVF's standards, the adequacy of documentation of the claimed losses, what percentage of the claimed losses were actually invested in Madoff Securities1, whether the claimant was the "ultimate investor" or only an intermediary, and how much a claimant may have recovered from other sources.2 That work is critical to making it possible for victims to receive the largest possible payout, without dilution from overstated or ineligible claims.3

Results of the Review Process.   To date, more than 21,000 claims (or approximately one third of all claims) covering $14.1 billion in losses, have been through an initial detailed review.4 Every claim is different, and these 21,000 claims may not be representative of the remaining claims. Nonetheless, the initial review of this group of claims provides some indication of early trends.

Overall, approximately 20% of the dollar value of claimed losses in the reviewed claims appear to be ineligible for a payment, mainly because they were filed by entities rather than individual victims.5 Roughly 74% of the dollar amount of reviewed claims could become eligible, but are missing some element of documentation to verify the computation of investment loss or do not contain sufficient documentation to allow us to estimate the amount of any "verifiable" loss that was allocated to Madoff. Only a very small percentage of claims can be recommended for approval in full right out of the envelope.

MVF attempts to review groups of claims that present similar characteristics, such as the investment vehicles that were involved. Thus, investments through one investment vehicle might have 90% of their reported losses verifiable, while investments in another vehicle might have only 10% of losses verifiable due to various factors. In the claims we have reviewed to date, more than 300 different investment vehicles were utilized. Based on our work to date, we expect that victims utilized more than 1,000 Madoff-linked investment vehicles.

Approximately 2,800 of the claims reviewed, or about 13%, involve a direct investment in a feeder fund that in turn invested into Madoff Securities.6 We refer to such direct feeder fund investments as being "one tier" away from Madoff. Evaluating these direct feeder fund investments is a relatively straightforward process, as there should only be one set of account statements. However, that simple structure seems to have been a relatively small proportion of how most victim's funds got into Madoff. Nearly 11,600 of the reviewed claims, or 55% of the total, involved an initial investment that was two tiers away from Madoff (one investment fund or other product between the victim and the feeder fund with a direct account). Adding another investment fund between the investor and the feeder fund complicates the determination of how much of the victim's original investment ultimately made it into Madoff Securities.

Somewhat surprisingly, nearly 27% of the reviewed claims involved initial investments that were three tiers away from Madoff. That means that a victim's investment went through two separate financial intermediaries before reaching whatever entity held a direct account with Madoff Securities. This of course involves a much more challenging task in verifying the flow-through of investor cash. Incredibly, over 800 claims, or nearly 4% of the total, involved an initial investment that was at least four tiers away from Madoff. As the number of steps rises in the path of any investment to Madoff, the difficulty for the claimant of documenting their loss will also rise considerably. Here the burden of proving an actual investment loss remains solely on the claimant.

Similarly, some individuals only had a handful of individual transactions that must be documented. Irrespective of the number of levels, an investor that only had three transactions involving Madoff-linked products will have a relatively easy job of documenting those transactions. At the other extreme, we have seen some individuals whose accounts had over 450 Madoff-linked transactions. The ranges in number of transactions and number of tiers among the claims we have reviewed make estimating the eventual size of the approved claims base (and hence the likely payout rate) quite unreliable until we have reviewed a much larger group of claims.

Notice Process.   Before MVF recommends approval, partial disallowance or complete rejection of a claim to the Department of Justice, each claimant will receive a formal notice informing them of any defects that exist in their claim. Claimants will then have a limited period of time to "cure" any defects by filing supplemental information.

However, MVF has already begun to send informal notices to claimants regarding deficiencies that we have noted in initial claim reviews. Thus, if upon its initial review a claim seems to have a specific defect (curable or not), MVF will send a notice raising this issue with the claimant. Similarly, if we observe that a given investment vehicle was only partially invested in Madoff Securities, but the claim covers all funds in that entity, we may send a notice seeking information regarding the Madoff "allocation percentage".

Claimants who receive these informal notices should understand that they are not "final" notices. The claimant will still receive a formal deficiency notice, and have time to cure the claim. However, at the stage of the formal notice the time allowed for a complete cure will be limited. Thus, the informal notices are designed to give potentially eligible victims more time to assemble necessary documentation without delaying the time frame for finishing review of all the claims. We anticipate that at least 25% of all claims will have received informal notices before the end of this calendar year.

Looking Forward.   We appreciate that every victim of the Madoff crimes would like to receive compensation for their losses without delay. Unfortunately, with claimed losses exceeding $76.65 billion, we have a vast amount of financial data to review and evaluate. Our staff is reviewing as many claims as quickly as possible, and we will shortly begin much larger mailings of informal deficiency notices. We will also continue to update our website every few months to provide additional information, though during this stage of the process general updates are not as important as focus on completing each individual claim.

Over the next few months, several factors are likely to increase our knowledge significantly from where it is today. The number of claims initially reviewed will continue to rise steadily from where we are today. In addition, through responses to informal deficiency notices, MVF will be able to develop a better assessment of how the deficient claims will sort out in both completion and dollar value. Of course our ultimate goal is to complete the review of every claim as quickly as possible.

Based on the number of claims that after review seem ineligible, MVF believes that for every one of the 2,500 claimants who have recovered payments through the bankruptcy, there were at least another 20 victims whose money was also stolen. This makes us highly confident that MVF will ultimately be successful in providing financial assistance to thousands of victims who would otherwise never have received any recovery at all. Despite the complexities of the case, that simple fact gives our staff at MVF enormous motivation every day as we continue to push this process forward as quickly as possible.


1. Some feeder funds and investment products were 100% invested in Madoff Securities. Other products involved managers who placed money with Madoff Securities, but also into other non-Madoff investments. In these latter "mixed investment" products, claimants must demonstrate, and MVF must verify, what proportion of the net invested funds actually went into Madoff Securities. We refer to this as the "allocation percentage" of a given investment. For every $100 million that a victim invested in an investment fund with a Madoff allocation percentage of 2%, the eligible claim to MVF will only be $2 million. Thus, this factor has a significant effect on a sizeable number of individual claims, as well as on the adjusted aggregate investment losses.
2. Quite a few claims were filed by trusts, trust companies or other "legal entities" rather than by individuals. In most cases, "legal entities" are not eligible, while the individuals who were the ultimate owners of the funds that were lost are eligible. Where legal entities filed instead of eligible individuals, MVF gives the entity the opportunity to convert the filing to filings on behalf of the relevant individuals.
3. Since MVF currently has approximately $4 billion in assets, if all $76.6 billion in claims were simply accepted at face value, victims would receive slightly over 5 cents for every dollar of eligible loss. However, as the total dollar amount of verified claims is reduced in the review process, the level of an eventual payout to victims goes up. Thus, if after review claims of $38 billion are recommended and approved, victims would each get approximately 10.5 cents per dollar of loss. If total approved claims total only $18 billion, the payout to victims would be just over 22 cents per dollar of loss. Thus, being careful not to allow inflated claims enables the real victims to recover the largest amount.
4. Some claims only need to be reviewed once before being deemed potentially eligible or ineligible, while other claims require follow up work on either eligibility or loss computation.
5. Some of these claims will ultimately be converted to claims on behalf of underlying victims. All of the claimants who appear ineligible will receive a notice and have an opportunity to supply additional proof.
6. We refer to such an investment as being "one tier" away from Madoff, compared to a direct investment that would be 0 tiers away. An investment in XYZ Growth Fund that in turn invested in Kingate Euro that in turn invested in Madoff Securities would be what we call "two tiers" away from Madoff, and so on.


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