Special Master Richard C. Breeden

MAY 2015 UPDATE

from the Special Master


Since our last update in the fall, MVF has been extremely busy reviewing claims submitted by Madoff victims from around the world. We haven't had any major milestones to announce, but the work has proceeded at a very fast pace. I hope that this update will help each victim to understand the considerable progress that has been accomplished, and the steps that lie ahead.

As we have noted in prior updates, the Madoff fraud represents what we believe to be the largest theft ever committed. To date, MVF has received claims from 63,737 persons in 135 countries. Initial claims of loss were approximately $77.3 billion. While the aggregate losses are stunning, we know that behind the aggregate numbers lie real people who suffered an unexpected loss that in many cases was life-shattering. Most of MVF's claimants have not received any money through the Madoff bankruptcy proceeding or other programs, and most are not eligible for other relief. That knowledge animates our efforts to provide a meaningful recovery.

MVF's program is designed to allow all Madoff victims to seek a recovery for their actual losses, subject to our eligibility standards which involve relatively simple principles. Eligibility is universal in the sense that it doesn't matter if a victim's funds went directly into Madoff, or whether they came in indirectly after first travelling through one, two, three or more intermediary investment funds. However, whether they invested directly or indirectly, the claimant must show that the money that was stolen actually belonged to them, and not to some other person. For example, there are thousands of claims that involve nominee entities such as personal holding companies, corporations, foundations or trust entities as claimants. Some of those entities are eligible, but generally there are one or more individuals who are the proper claimants as the actual victims. Thus, determining if a claimant was the ultimate owner of an investment or merely a nominee or intermediary is an important element in the review of every claim.

The eligible loss amount is the actual cash invested in Madoff by a victim, less all the cash previously recovered. In some cases that is a relatively simple determination with only a limited number of transactions to review. However, other claims involve hundreds of transactions over many years. The calculation of loss is especially important, but also sometimes very complicated, where a victim invested in a fund that put money in Madoff and non-Madoff investments. In that situation we have to be sure that only the portion of funds attributable to the Madoff investment is included in the claim amount.

While most victim cash came in via investment vehicles that were invested 100% in Madoff, tens of thousands of claims involve victim cash moving through funds that might have had as little as 1% to 5% (or as much as 90%) allocated to Madoff, with the balance of funds going into legitimate investments where the funds were not stolen. We have some claims that involve an investment of a very large sum, but with a very small percentage that went into Madoff. Reducing such a claim to its Madoff allocated amount is critical to not overstating, and not overpaying, that claim. Similarly, in some situations it is relatively straightforward math to be sure that all phony profits are stripped out of a claim. In other cases this is more difficult, as when money moved in or out of Madoff via a fund's internal changes in NAV rather than through redemption transactions by the investor.

MVF's standards "disqualify" certain types of claimants, including anyone related to the Madoff family, or anyone who profited by the Madoff investments of others. However, to apply such restrictions, as well as to protect against cash transfers to persons subject to restrictions on assets (such as terrorists or officials of certain regimes), we must be certain of the identity of the real victim, and not a nominee.

As simple as these standards are to articulate, the practical reality of verifying the losses is complex. We know of more than 1,200 separate investment funds or products (we sometimes use the general description of "investment vehicles") through which the victim money was funneled into Madoff. MVF has done a great deal of work to document the various paths that victim funds took. Once we verify such a "path to Madoff", we can approve or reject dozens or hundreds of claims where money travelled through the same path. However, untangling these flows of cash years after the fact can be very challenging. We don't want to unfairly exclude some victims, or approve inflated claims for other victims, so we have to get the numbers right.

MVF has roughly 60,000 claimants whose accounts were never reviewed in the bankruptcy proceedings, and we are doing so for the first time. We have received millions of pages of documents explaining investment structures or documenting transactions. Claims involving entities that are not an individual are particularly complex, as are claims in some foreign languages. The burden of proving claim eligibility and the eligible amount of the loss is on the claimant. However, we do not want to reject claims that aren't well-documented if we can assist the claimant to show the necessary facts. Our goal is to help claimants, not drown them in paperwork. However, we can't simply accept claims that aren't verifiable without risking dilution of legitimate claims.

The primary beneficiaries of carefully reviewing the claims and verifying the amounts really lost are the actual victims. Every dollar paid on excessive claims would dilute the recovery on genuine claims if they survived the review process. It is simple mathematics, but if we had distributed our approximately $4 billion in assets evenly across the initial claims of $77.3 billion, each victim would have received an average payout of only approximately 5.2% of their total loss. If hypothetically the same $4 billion were to be distributed across verified claims of only $57 billion, victims would receive an average payout of 7%. Distributing the same $4 billion over $37 billion would produce an average distribution of 10.8%, and so on.

MVF can't increase the $4 billion it has available in resources. However, by identifying excessive claims we are able to increase significantly the percentage of loss that will be paid on real losses compared to what it would otherwise have been if all claims had been accepted at face amount. As a result, we guard the claim denominator fiercely against being inflated by ineligible or non-existent losses.

We don't yet know what the final approved loss number will be. However, as a result of our claims reviews during the last 12 months we have been able to remove approximately $18.5 billion in excessive claims, thereby bringing the maximum potential total approvable claims denominator down to $58.8 billion today. That number will fall as we continue to review claims and eliminate ineligible amounts. As a result of this work, the potential average payout to victims has risen by approximately 24% already, from 5% initially to nearly 7% today. The potential future payout percentage will continue to climb throughout the claim review process until all claims have a verified loss amount.

The cumulative verified loss on all approved claims we will recommend to the Department of Justice for approval is what we call the "claim denominator". The sum of the claim denominator at any point in time and the total dollar amount of all unreviewed claims or claims pending resolution is what we call the "maximum potential claim base". Thus, today the claim denominator is approximately $1.3 billion, while the maximum potential claim base is over $58 billion. As the process moves forward those two numbers will converge significantly, narrowing the range of what the final claim denominator might be. Convergence in the two numbers will come both from approving new claims, and from disallowing other claims. Getting these two numbers into a much narrower range is the key to being able to know what we can distribute, and to whom. It is worth noting that what MVF ultimately determines the "claim denominator" to be will differ from the total amount of approved claims in the bankruptcy proceedings because of different eligibility criteria under the two processes.

Progress in the Review Effort

In the roughly 12 months from the claim deadline of April 30, 2014 to May 15, 2015, MVF reviewed 34,257 claims for eligibility and for the verification of loss amounts. This number includes 3,819 claims that were disqualified on review due to duplication or other eligibility issues. Thus, MVF has reviewed roughly 54% of the total number of claims, leaving us a bit more than half way through the initial claims review phase.

As of May 15, 2015, there were just over 7,010 claims that I will recommend to the Department of Justice for approval to pay. I will recommend approximately 3,900 additional claims that are missing only the signature of the appropriate person once the signatures are received (which I expect to occur in all cases). As a result, 12 months into the review process MVF has roughly 11,000 claims that can be recommended to the Department. The aggregate verified losses on those claims is approximately $1.3 billion. As a matter of contrast, in the bankruptcy proceedings a much larger sum has been distributed, but those distributions are going to approximately 2,550 accounts. It is likely that MVF's 11,000 "approved" claims will at least double in number, and perhaps more, before our reviews are completed. So, MVF's distributions of cash will be spread across a much wider base of victims.

By far the greatest number of claims that MVF has reviewed are missing some form of required documentation. We call those claims "deficient", but it would be equally accurate to simply call them "pending further review". Claims may be missing one or more transaction documents, account statements from relevant periods, or other information vital to determining the proper claimant or the amount of eligible loss. Though it will not always happen, we hope to see each "pending resolution" claim ultimately converted into an approved claim. Toward that end, if you receive a notice that your claim is considered "deficient" at any point in the process, please provide the information that we request. You can call our toll free numbers or email us for assistance in preparing supplemental information.

Of the claims that had been reviewed as of mid-May this year, 22,799, or about two thirds of the total, have one or more deficiencies. These claims show approximately $21 billion in losses in their original submission to us. After we review a claim that is deficient, MVF will generally send out an informal deficiency notice or "IDN" to let you know what information your claim is missing. So far, MVF has sent out approximately 11,700 IDNs to claimants. We have received responses from 2,389 recipients of IDNs, and we appreciate the prompt response of these claimants. If you receive an IDN, you should respond to it promptly.


To date, MVF has identified approximately 3,800 duplicate claims, and approximately 700 more claims that do not meet MVF eligibility standards. As Special Master, it is part of my job to recommend that the Department of Justice should deny these claims. However, before the Department takes final action (and the decision on approving or denying all recommendations is theirs alone) each of these claims will receive a notice advising of the reason the claim does not meet the eligibility standards. Before any action is taken, the claimant will have an opportunity to provide further evidence that the claim does meet MVF's standards.

Net change in maximum potential claim base

As a result of our claim reviews, MVF now believes that it has identified $18.5 billion in initial claims that should not be approved. This brings the maximum potential claims base down to $58.8 billion compared to the initial claims of $77.3 billion. Approximately half of the claim reduction results from ineligible or otherwise excludable claims, including duplicates. The other half of the reductions come from determining that eligible losses were lower than first claimed, mostly due to mixed asset allocations. All victims benefit from an accurate claim denominator, and we are proud that we have already been able to increase the likely average future payout percentage significantly.

MVF has 29,264 claims yet to review, and approximately 22,800 deficient claims that must still be resolved. Therefore, over the next six months you will continue to see fairly significant changes in the number of approved claims and in the aggregate claim denominator or total approved loss amount. "Approved" losses should grow significantly over that period. At the same time, the maximum potential claim base should continue to fall at an even faster pace as claims are reviewed, which reflects the fact that we are replacing the original claim amounts with the verified loss amounts. The biggest change in the maximum potential claim base will come when MVF finishes reviewing the investment allocation percentages of all known investment vehicles. As we determine the Madoff investment allocation percentage of the remaining 300-400 investment vehicles, we will be able to separate Madoff and non-Madoff losses on thousands of additional claims.


For most of the past year, MVF has been very busy reviewing your claims. Until we had reviewed at least half the claims, announcing preliminary findings could have been misleading. The claims reviewed were not a sufficiently large sample, and claims are all unique. However, MVF's claim reviews will shortly pass 60% of the claims. Equally importantly, the "deficient" claims are starting to provide supplemental data that will allow the eligible loss calculations to be made. Thus, we are entering a period when our confidence in understanding the size of the likely aggregate eligible loss (the likely final claim denominator) should grow considerably.

We anticipate making our next update in early September. We aren't yet to the point where we can reliably predict the time for commencing cash distributions. However, the more progress we make in narrowing the gap between the current claim denominator and the maximum potential claim base, the closer that time will approach.

There is a great deal of work still to do, and thousands of claimants still need to provide supplemental information to resolve deficiencies. The faster claimants do that, the faster MVF will be able to complete our reviews of your claims. Nonetheless, barring unforeseen developments I am quite optimistic that we should soon be able to project when the transition to cash distributions will begin.

Thank you for reading this somewhat technical update, and as always please don't hesitate to address any questions to me at info@madoffvictimfund.com.



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