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US: Madoff Case Faces Crucial Disclosure Deadline

by Diana B. HenriquesNew York Times
December 30th, 2008

The federal court in Manhattan will be the forum in the coming weeks for three important issues affecting investors caught in the widening scandal surrounding Bernard L. Madoff, who is accused of operating a $50 billion Ponzi scheme.

Most important, Judge Louis L. Stanton of United States District Court, who is handling the civil case against Mr. Madoff, is being urged to consider broadening the protections normally available to investors in failed Wall Street firms to allow for the “devastating” circumstances of the Madoff scandal.

Judge Stanton has also established Wednesday as the deadline for Mr. Madoff to provide federal securities regulators with a full accounting of his and his New York firm’s assets — from real estate to art works to bank accounts. Regulators are to notify the judge if the report is not filed on time.

And finally, the court-appointed trustee overseeing the liquidation of Mr. Madoff’s brokerage firm has announced that he will send out the first mass notification to customers of the firm by the end of next week.

These developments in the civil case are paralleling a federal criminal case accusing Mr. Madoff of securities fraud, based on accounts that he confessed to his sons on Dec. 10 that his entire business was “a lie” and a giant Ponzi scheme. According to court filings, he himself put the losses as high as $50 billion.

Because Mr. Madoff operated a brokerage firm, some of his direct investors may be covered under the Securities Investor Protection Corporation, a federal fund created to cover fraud losses in brokerage accounts.

But many of the victims were not direct customers of the Madoff brokerage firm, Bernard L. Madoff Investment Securities. Instead, they had invested in various “feeder funds,” some of them operated by well-known Wall Street figures, which in turn invested with Mr. Madoff.

In a letter posted in the court docket on Monday, one indirect investor — Daniel R. Goldenson of Bremen, Me. — urged Judge Stanton to consider looking past those feeder funds to the individuals ultimately affected by Mr. Madoff’s collapse. They, not just the feeder funds, should be considered direct customers of Mr. Madoff’s firm, Mr. Goldenson argued.

He acknowledged in his letter that a strict reading of the SIPC guidelines would not treat him as a customer. “But in this devastating case we feel it is appropriate to broaden investors eligibility beyond direct investments,” Mr. Goldenson wrote.

“Please consider broadening access to SIPC for all individuals who lost so much or all of their life savings,” he concluded. “This was an intertwined system of deceit and theft within our financial markets that has left retirees like ourselves having to sell our homes and raise money any way we can.”

Judge Stanton acknowledged the letter, but simply cited the early stages of the case and the complex legal issues that surround eligibility for brokerage-account protection without indicating whether he would consider Mr. Goldenson’s request.

Stephen P. Harbeck, the president of SIPC, said in an interview that he could not predict whether the courts would follow Mr. Goldenson’s suggestion. The crucial step now, he said, is for affected investors to submit their claims, so that they are on the record as the legal issues are worked out.

That process is ready to move forward, as the trustee working for SIPC has notified the federal bankruptcy court handling the liquidation of the Madoff firm that he is ready to send out the first published and mailed notices to Madoff customers by Jan. 9, a week from Friday.

Given early accounts that the records for Mr. Madoff’s money management clients were found in considerable disarray, the announcement came earlier than many lawyers in the case had expected and will speed up the day when the legal issue of SIPC coverage can be considered in court.

On Tuesday morning, Federal Bankruptcy Judge Burton Lifland approved a request from the trustee, Irving H. Picard of the Baker Hostetler law firm, to transfer $28.1 million to cover on-going expenses for the Madoff brokerage business, including salaries and benefits of employees.

The funds were transferred to the trustee under an agreement with the Bank of New York Mellon, which holds three of the five bank accounts identified in court papers as be-longing to Mr. Madoff or his firm.



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