Special Master Richard C. Breeden

SUMMER 2017 UPDATE

The Payment Process Begins



The Department of Justice (the Department or DOJ) and the Madoff Victim Fund (MVF) are pleased to announce the beginning of MVF's Payment Phase. In early June, the Department approved over 35,500 petitions with total losses in excess of $6.5 billion. Approved petitioners should expect to receive notification of these decisions in the coming weeks. Earlier this spring the Department denied approximately 24,000 petitions, and the appeal (reconsideration) process is continuing for these petitions. Thus, as a result of these recent decisions, the Department has now taken formal action on just under 60,000 petitions, and MVF remains on track to distribute initial payments to victims during 2017.


Background

The MVF was created in 2013, and the deadline for filing petitions with MVF was April 30, 2014. Since that time, the MVF team has been hard at work evaluating 65,500 petitions filed with us claiming approximately $78 billion in losses on Madoff-related investments. Petitions came from victims of the fraud in 136 countries. We have reviewed carefully over 403,000 individual Madoff transactions in 13 currencies. Approximately 4.5 million pages of backup documentation also needed to be reviewed. In the three-years and two months since the petition filing deadline, every petition has received careful and thorough consideration. Our objectives have been to confirm that the petition is eligible and that the amount claimed is accurate. Ineligible or overstated petitions can enormously dilute the potential recoveries of real victims.

Any person who invested in Madoff directly or indirectly and lost their own funds as a direct result of the fraud is eligible for remission, provided that they meet all requirements of the Distribution Plan. A victim may be eligible for remission no matter who handled or managed their money on its way to Madoff. This includes investments made through a fund that profited from Madoff, and hence was ineligible to recover in the bankruptcy proceeding, or a fund that is no longer in existence.

Many of the 65,500 petitions involve complex loss calculations. For example, victims made Madoff-related investments through more than 1,600 different investment vehicles of almost every different type. These included over 68,000 separate investments (some petitions include multiple investments) through one or more of 30 different feeder funds. In more than 38,500 instances, the victim's cash passed through at least one investment entity after leaving the victim and before reaching the entity that held a direct Madoff account. However, over 14,000 victims had investments that moved through either three or four different entities on the way to the Madoff accountholder. This work enabled MVF to identify the tens of thousands of victims of Madoff's fraud whose petitions have now been approved by the Department.

A critical feature of this Distribution Plan is the evaluation of individual petitions from indirect investors. Most of the large feeder funds have been involved in extensive litigation, and many have been liquidated. Many others sold their bankruptcy claims, so that the underlying investors were cut off from future payouts. Therefore, if MVF had simply distributed our assets to direct Madoff accountholders, in most cases the distribution would never have reached the underlying victims. Therefore, the Distribution Plan approved by DOJ is designed to allow MVF to pay the underlying victims directly.


Formal Claim Recommendations

In MVF's May 2016 update, I advised that MVF expected to recommend approval of just over 25,000 petitions to DOJ in our first formal Report, which I projected would be filed by the end of August 2016. In a later update, we noted that it proved to be more efficient to deliver recommendations through a series of reports. Over the past nine months, MVF has made formal recommendations on all of the approved and denied claims, and we are nearing the end of our formal recommendations process now.

In the May 2016 update, I also noted that almost 31,000 petitions involving approximately $27 billion were incomplete, or "deficient". As I explained then, these petitions needed to be resolved through a process involving "claim deficiency notices," or "CDNs". MVF had distributed over 26,000 "informal" deficiency notices earlier in the process, and we subsequently sent out more than 37,000 formal CDNs. CDNs resulted in more than 16,000 responses and over 566,000 pages of supplemental information. I am delighted that the formal and informal deficiency processes have allowed me to recommend approval of more than 14,000 additional victim petitions.

There are approximately 5,800 additional petitions involving $9.8 billion that will be part of a formal recommendation to the Department once my team has reviewed the supplemental information provided as part of completing the deficiency process.


First Time Recoveries

About 98 percent of MVF's 35,500 approved petitions came from indirect investors who were not eligible to recover in the Madoff bankruptcy. Approximately 30,000 of these victims have recovered less than 2 percent of their losses from collateral sources. More than 26,000 of the approved victims have not previously recovered anything on their losses. MVF's upcoming distributions will allow these victims to share in a recovery for the first time.


DOJ Action to Date

As noted above, the Department issued decisions in June 2017 approving over 35,500 petitions, or roughly 54% of total petitions. In addition, after careful review, over 24,000 petitions, or roughly 37% of total petitions, were formally denied by DOJ in March 2017. MVF has transmitted a "Final Determination Notice" or "FDN" to these petitioners advising them of the action that has been taken. This process allows petitioners to request reconsideration of the denial. Where a petition was denied because of incomplete documentation, this process offers a final opportunity for the petitioner to provide the missing information. MVF has already received more than 650 requests for reconsideration ("RFR"). MVF reviews all RFRs to make sure that we have correctly assessed the documents filed with us. DOJ will also review and issue a decision on each RFR, using a different person than the official who made the original decision.

The RFR process helps ensure fairness to all petitioners, and is critical to the calculation of actual payouts. All petitions and all RFRs have to be finalized before MVF can calculate the final dollar amount of approved petitions. MVF's assets divided by total approved petitions determines the payout percentage of approved losses that each victim will receive. We are nearing the deadline for filing RFRs on these 24,000 denials, so this phase is proceeding very rapidly.


When Will Payouts Commence?

In January I advised that "MVF must complete the review of the remaining open claims (approximately 14% of all claims) and submit our recommendations to DOJ...We now expect that the initial distribution will take place sometime in 2017 and will be larger than we originally had anticipated." We remain on schedule.

In January, I also advised that "MVF will update the website as soon as we receive additional information on the timing and amount of the first payout." We don't yet know with certainty what date to expect, other than that it should be this year.

We are currently planning on a first distribution of cash prior to the end of this year. We are committed to this goal, and we are very optimistic we will succeed. Not every petitioner will receive a check in the first of what will be several consecutive payouts, but we anticipate distributions to tens of thousands of victims.


How Much Am I Likely to Receive?

Every victim has a large stake in how the RFR process is completed. We assume today that MVF will ultimately approve about 40,000 petitions, and our final approved loss total is likely to continue rising from the current level. Assuming, for example, we ultimately had $16 billion in approved petitions, then a pro rata payout using the $4.05 billion in distributable assets would be approximately 25 cents on each dollar of approved loss. If the final aggregate petition amount proves higher or lower, the payout percentage will vary proportionately.

To the extent that RFRs are successful, the dollar amount of approved petitions could end up being higher than our current anticipated range. This would correspondingly reduce the percentage payout to each victim. Thus, every appeal, whether from a large or small investor, can result in a final denominator that is larger, but resulting in a smaller payout. Correspondingly, if the total amount of final approved petitions is less than the range we anticipate, and there are no successful appeals, then the final distribution percentage will be higher.

When we are much closer to the date of the first payout, MVF will evaluate all unfinished petitions and outstanding appeals. We will then recommend a first "interim" payout percentage to DOJ that includes reserves sufficient to enable MVF to be able to satisfy every approved petition no matter how the RFRs are resolved. Between now and then, the more RFRs and petitions that are resolved, the lower the reserves MVF might need to retain.

As set forth in the Plan, and as we have indicated in other updates, payments will go to petitioners who have received less than the percentage of loss that MVF is able to pay. This payment methodology is designed to allow victims who have recovered nothing or very little to receive payments before those who may have already recovered a large percentage of their loss.

On behalf of everyone involved in this process, we are delighted that final decisions have now been reached on nearly 60,000 petitions, and that payments to more than 35,500 victims will be able to commence in the near future. We will continue to provide updates as the payment phase of the process unfolds.

Respectfully,

Richard C. Breeden
Special Master



© 2017 - RCB Fund Services, LLC.