Madoff trustee settles with Cayman feeder funds

Total recovered exceeds $10 billion

The trustee recovering money for thousands of victims of the Bernard Madoff Ponzi scheme has reached a $500 million settlement with two funds that invested in Bernard L. Madoff Investment Securities LLC.  

The feeder funds Herald Fund SPC and Primeo Fund, which are undergoing liquidation in the Cayman Islands, will add $497 million to the money raised on behalf of defrauded investors, trustee Irving Picard announced Monday.  

This brings the total amount recovered to $10.3 billion since the fraud was uncovered in December 2008. 

The majority of the nearly half-billion settlement will be paid by Herald Fund SPC and concerns withdrawals the fund made in the six years prior to Madoff’s arrest. The agreement settles so-called clawback claims by the trustee who argued that because in a Ponzi scheme no actual investment activity takes place, any profits paid to early investors are fictitious and funded with the investments made by later investors.  

The circumstances under which “fictitious” profits and earlier investments have to be returned by investors to the estate to be redistributed more equitably among all the victims of the fraud are still, in many cases, being contested in court.  

However, Herald Fund and its investors are also victims of the fraud, and as a result of the settlement are now eligible to recover up to $1.6 billion that can be redistributed to investors. 

Russell Smith and Niall Goodsir-Cullen of BDO CRI (Cayman) Ltd., the principal liquidators of Herald Fund, said the settlement is very beneficial to Herald’s stakeholders.  

The agreement allows a customer claim for Herald in the BLMIS estate of approximately $1.64 billion free of any subordination or holdback, BDO said. 

It also represents the full resolution of the trustee’s clawback claims against Herald, which were originally as high as $578 million. Herald’s shareholders will not be required to enter into any due diligence procedures with the trustee in order to be eligible for distributions in Herald’s liquidation, the liquidators said.  

“By any measure, the settlement terms are highly advantageous, not only to [Madoff’s] direct customers, but also potentially to the indirect investors in the Herald Fund,” said Oren Warshavsky, trustee Picard’s lead attorney. 

Under the terms of the settlement, Herald will receive a credit of $100 million against its clawback liability relating to a payment made earlier this year by JPMorgan, since part of the payment was made in satisfaction of clawback claims against JPMorgan in its capacity as a Herald shareholder. 

Applying this credit and other credits of $10 million to the amount of the withdrawals made by Herald through its Luxembourg-based custodian, HSBC Securities Services (Luxembourg) S.A., Herald has agreed to pay the trustee $467,701,943 to fully satisfy the trustee’s claims against Herald. 

Herald’s customer claim will be allowed in the amount of $1,639,896,943, calculated by adding 100 percent of the agreed clawback liability onto the $1,172,195,000 net loss of invested principal suffered by Herald’s investors in the Madoff fraud.  

It is the first time in several years that the Madoff trustee has agreed to a full 100 percent springing claim in a settlement, BDO said.  

“Assuming a 75 percent total recovery on Madoff customer claims, Herald expects to receive approximately $500 million in addition to the money it will receive in catch-up distributions, bringing its ultimate total recovery under this settlement to $760 million in unencumbered cash available to distribute to its investors. This amount does not include the $13 million to $15 million that Herald expects to receive from the JPMorgan class action settlement, nor does it include the value of Herald’s ongoing claim against HSSL in the Luxembourg Courts as well as other potential claims,” the liquidators said. 

The settlement remains subject to approval by the Grand Court of the Cayman Islands and by the bankruptcy court in New York, with hearings scheduled before the end of the year. 

Alg-Irving-Picard

Mr. Picard

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