The Palm Beach Post

Ponzi deniers seek records to shield their profit

- By Erik Larson

Scores of Bernard Madoff ’s former customers are pushing for access to a massive database of trading records and other documents seized from the con man’s now-defunct securities firm to advance a fringe theory about the epic fraud: It wasn’t a Ponzi scheme.

Bizarre though it sounds, there’s a reason why they’re advancing the claim: If it wasn’t a Ponzi scheme, they needn’t surrender more than $100 million in what the trustee of Madoff ’s firm calls false trading profits.

The customers say they can prove that Madoff used cash from his investment advisory customers to buy billions of dollars in Treasuries and held Fortune 100 stocks that appeared on their statements. That, they argue, would defeat the trustee’s claim that it was all a Ponzi scheme in which no real trading took place — a theory the trustee calls pure fiction.

“The standard for a Ponzi scheme is that there is no legitimate business, but Madoff was the single largest market-maker in the world,” said lawyer Helen Davis Chaitman, who represents about 70 customers. “I believe I can prove that securities were purchased for some of my customers.”

The dispute highlights how almost a decade after Madoff admitted using money from new investors to repay older ones, basic elements of one of the biggest scandals in history are still hotly contested by some victims.

Irving Picard, the trustee of Madoff ’s firm, has recovered more than $13 billion for victims, largely by suing customers who withdrew more money from Madoff than they put in — what he calls fake profit. But Chaitman says Picard is wrong. She contends it was the U.S. Securities and Exchange Commission that was defrauded because Madoff lied

about his trading losses and debt load — but not about the trading itself.

As a result, customer claims for losses should be based on their final account statements — a total of $64 billion for all Madoff clients — rather than their total lost principal of $17.5 billion, she says.

“They haven’t proved it, after all this time and all this money,” Carol Neville, another lawyer for the customers, said at a July 25 bankruptcy court hearing in New York.

Since 2016 Chaitman has sought access to a collection of 30 million documents from the business and Madoff ’s market-making unit, searching for any paper trail linking real securities to the investment advisory cash. The database contains every shred of evidence from Madoff ’s offices, from the contents of floppy disks and hard drives, to the papers that were found on employees’ desks when the authoritie­s arrived.

The database “will disprove what he’s represente­d throughout the case,” Chaitman said of Picard. “Why wouldn’t he just give us access — there’s no cost to him.”

Madoff in his 2009 guilty plea traced his Ponzi scheme to 1992, while prosecutor­s at a 2014 trial of five Madoff aides said there was never actual trading. Matthew Schwartz, one of the prosecutor­s in the sprawling case, was dismissive of Chaitman’s argument. Madoff didn’t have securities on-hand to sell, forcing his employees to carefully track the balance of the single “slush fund” account at JPMorgan Chase & Co. where all customer money was deposited and withdrawn, he said.

“Bernard Madoff ’s fraud was a Ponzi scheme if ever there was one,” Schwartz, now a white-collar defense lawyer at Boies Schiller & Flexner, said in an email. “The evidence at trial proved beyond a reasonable doubt that Madoff did not buy and sell securities for his investment advisory clients.”

 ?? JIN LEE / BLOOMBERG 2009 ?? The legal dispute highlights how almost a decade after Bernard Madoff (center) was convicted, the scandal is still hotly contested by some victims.
JIN LEE / BLOOMBERG 2009 The legal dispute highlights how almost a decade after Bernard Madoff (center) was convicted, the scandal is still hotly contested by some victims.

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