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Court battle to begin over counting Madoff losses

Thousands of victims of Bernard Madoff will be riveted this morning to a major legal battle in a Manhattan courtroom that will determine how much - if anything - they can recover in Wall Street's biggest Ponzi scheme.

The court at the historic U.S. Custom House will be packed as lawyers for the investors square off against bankruptcy trustee Irving Picard and the government in a battle over how the massive losses should be counted.

PHOTOS: Click here to see images from the Bernie Madoff case

Picard has calculated a lower loss figure of about $20 billion compared to the $65 billion Madoff's customers thought they had in accounts.

"This is critical because there are so many people who would get more money if the higher figure is used, which would ease the burden and pain they have gone through," said Garden City attorney Jerry Reisman, who represents some investors.

At least in the first instance, it will be Judge Burton Lifland who decides whether the thousands of investors can recoup any part of the $1.6 billion in assets Picard has found or if they should walk away with nothing.

While Madoff told investors in late 2008 that their accounts totaled $65 billion, in reality that tally was fictitious. Madoff never invested their money in stocks as he claimed, but instead ran a Ponzi scheme, paying off earlier investors with funds taken from newer victims. Madoff also paid himself and relatives lavish salaries and benefits, investigators found.

Picard, the Securities and Exchange Commission and the nonprofit Securities Investor Protection Corp. (SIPC) all essentially agree that to pay out customers based on what Madoff falsely said they earned would perpetuate his scam. Instead, Picard said, the law allows him to divide investors into two groups: "net winners" who took out more money than they put into their accounts and are owed nothing, and "net losers" who lost money they invested and should share in the assets.

Under Picard's calculation, net losers are eligible for up to $500,000 from SIPC and can get a proportionate share of whatever assets he finds. Some 1,871 investors have so far collected $620 million from SIPC.

But another 1,200 investors out of 9,900 who were denied claims have filed papers with Lifland disputing Picard's position. They claim Picard, in "derogation" of his obligation under federal law, has come up with his own incorrect definition of "net equity." Picard, the investors insist, should honor their "legitimate expectations" as reflected in the last account statements Madoff gave them.

If Lifland favors the net winners, Picard will have to use $65 billion as the loss figure. But with only $1.6 billion in assets recovered to date, each investor will get a smaller piece of the pie than if the loss figure were computed on what investors actually put in.

Madoff, 71, was sentenced in June to 150 years in prison. He is incarcerated at Butner Federal Correctional Institution in North Carolina.

PHOTOS: Click here to see images from the Bernie Madoff case

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