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JPMorgan’s $543M Madoff trustee settlement approved

Erik Larson//February 5, 2014

JPMorgan’s $543M Madoff trustee settlement approved

Erik Larson//February 5, 2014

JPMorgan Chase & Co.’s $543 million settlement with the trustee for Bernard Madoff’s defunct firm was approved by the judge overseeing its liquidation, ending a case in which thousands of investors accused the bank of turning a blind eye to the U.S.’s biggest Ponzi scheme.

The accord, reached Jan. 7, was approved Tuesday by U.S. Bankruptcy Judge Stuart Bernstein in New York. The deal resolves a lawsuit by the trustee, Irving Picard, and two related class action cases filed by Madoff victims who accused the bank of negligence.

“The settlements are fair, reasonable and in the best interest of the Madoff estate,” Bernstein said. The deals provide “substantial benefit” to victims, he said.

With the JPMorgan deal, Picard’s recoveries for victims topped $10 billion, or 59 percent of the $17 billion in principal lost by thousands of customers in Madoff’s investment advisory business. Picard alleged the bank helped perpetuate Madoff’s scam for years by ignoring signs of fraud.

Madoff deposited money from new customers into the account instead of investing it in securities, and made withdrawals to pay back earlier investors. The Ponzi scheme collapsed after Madoff’s confession and arrest in December 2008.

Picard said New York-based JPMorgan, the biggest U.S. bank, ignored signs of wrongdoing to benefit financially from the con man’s business.

Class actions

JPMorgan agreed to pay Picard $325 million to settle his lawsuit on behalf of thousands of victims, and another $218 million to resolve two related class action lawsuits that were filed with Picard’s assistance after an appeals court barred him from bringing common-law claims against the bank.

Picard had appealed the JPMorgan decision to the U.S. Supreme Court, which hasn’t decided whether it will hear the case.

The amount of the accord “indicated there was a value to the claims and the compromise made good sense,” David Sheehan, a lawyer for Picard, said at Tuesday’s hearing. There is no guarantee Picard will win at the Supreme Court, Sheehan said.

A group of about 200 Madoff victims who are “net winners” — customers who withdrew more money from the scam than they deposited — get nothing under the deal and have said in court filings they will sue the bank. They advised Bernstein in court papers that they were declining to be part of the JPMorgan accord.

“You’re opting out of a class you’re not a member of — sounds like a Groucho Marx joke,” Bernstein said to a lawyer for the group at Tuesday’s hearing.

Picard is pursuing claims totaling about $3.5 billion from UBS AG, HSBC Holdings Plc and UniCredit, which the trustee has also accused of benefiting from Madoff’s fraud. The banks have denied the claims.

At the same time Picard reached the deal with JPMorgan, the bank agreed to pay $1.7 billion to the U.S. to resolve related criminal allegations, and $350 million in a case by the Office of the Comptroller of the Currency.

The parallel efforts by the trustee and federal investigators have resulted in a total recovery for victims of almost $14 billion, or 82 percent of the lost principal. Picard has distributed about $4.9 billion to victims, with billions more held in reserve until legal issues are resolved.

Madoff, 75, pleaded guilty to fraud in 2009 and is serving a 150-year sentence at a federal prison in North Carolina. At least seven others pleaded guilty, including his brother Peter Madoff, who is serving a 10-year term.

Before the JPMorgan accord, Picard’s team had recovered $9.5 billion through lawsuits and out-of-court settlements, including $5 billion from the estate of Jeffry Picower, who began investing with Madoff in the 1970s. Picower, whom Picard called the biggest beneficiary of Madoff’s scheme, had a heart attack and drowned in a pool in Florida in October 2009.

U.S. investigators had recovered about $2.3 billion for Madoff investors before reaching their deal with JPMorgan, including $2.2 billion from Picower’s estate and $100 million from Madoff’s Midtown Manhattan penthouse apartment and other belongings. The JPMorgan deal brings total U.S. recoveries to $4 billion — a sum it will distribute through a separate process from the one used by Picard.

The liquidation case is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC, 08- bk-01789, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

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