Tough luck for Madoff feeder fund investors

madoff.gi.top.jpgBernard Madoff, mastermind behind the biggest Ponzi scam ever, was sentenced to 150 years in federal prison. By Aaron Smith, staff writer


NEW YORK (CNNMoney.com) -- Most of Bernard Madoff's victims have two things in common: a) they'd never heard of the Ponzi schemer before he was arrested nearly two years ago and b) they're not eligible to get any of their money back.

That's because the majority of Madoff's victims did not invest directly in his firm. They invested in third-party feeder funds, and therefore don't qualify for the financial protections extended to direct investors.

"I think it's grossly unfair," said Peter J. Leveton of Boulder, Colo., who counts himself as one of the more than 200 "indirect investors" who lost money to Agile Funds, a feeder fund for Madoff. "Virtually none of the Agile investors knew that any portion of our money was going into the Madoff organization."

So far, 16,394 claims have been filed by investors who claim to have lost money in Madoff's Ponzi scheme, according to the office of Irving Picard, the trustee appointed by federal bankruptcy court to recover and distribute stolen assets.

The majority of the claims -- 13,054, or nearly 80% of the total -- have been denied, according to the trustee. Most of these denied claims -- some 10,299 -- were shot down because the claimants are considered "third party" investors that put their money into feeder funds, rather than directly in Madoff's firm.

This detail is essential in getting money back from the seized assets, or in becoming eligible for insurance coverage from the Securities Investor Protection Corp., the organization that restores lost assets to investors burned by bankruptcy or fraud.

"The third party folks did not have an account with the Madoff brokerage firm," said SIPC Chief Executive Steve Harbeck. "They invested in some other entity that opened an account with the Madoff firm. That entity is a customer and will get whatever it's entitled to."

So while the feeder funds could be eligible for financial protection from SIPC, their investors are not.

Kenneth Springer, a certified fraud examiner and former special agent of the Federal Bureau of Investigation, said this is a case of caveat emptor -- let the buyer beware.

"When you go to a feeder fund, it's up to you to make sure that they're doing what [you] think they're doing," said Springer, president of Corporate Solutions and co-author of "Digging for Disclosure: Tactics for Protecting Your Firm's Assets from Swindlers, Scammers and Imposters."

"There's a whole lot of things that should have been uncovered by the feeder funds," he said. "But unfortunately with Madoff, you didn't see as many red flags as you did with Allen Stanford and other [alleged Ponzi scammers]."

SIPC provides a line of protection of up to $500,000 to eligible investors who lost money. The trustee has declared 2,355 investors to be eligible for more than $766 million in SIPC funds. This averages to about $325,000 per eligible investor.

SIPC-eligible investors who lost more than $500,000 must reclaim the rest of their damages from assets seized from Madoff's estate.

But they're unlikely to get all of their money back. So far, the trustee has recognized about $5.1 billion in claims that fit this description -- more than triple the amount of recovered assets that would be used to compensate them. About $1.5 billion of Madoff's estate has been recovered so far, according to the trustee. These assets will be awarded pro rata -- in proportion to what the investors put in and to what was recovered.

Meanwhile, the second anniversary of Madoff's arrest, which occurred on Dec. 11, 2008, is fast approaching. He's been incarcerated in federal prison since March, 2009, when he pleaded guilty to orchestrating the most massive Ponzi scheme in history while masquerading as a brilliant investor. He was sentenced to 150 years.

While Madoff languishes in prison, Leveton is organizing with other feeder fund investors to try to get Congress to change SIPC requirements. He wants the protection to be extended to the so-called "third parties" who unknowingly invested in Madoff and other Ponzi schemes.

"It seems to us that the group that actually sought out Madoff knew who he was," said Leveton. "It's the innocent victims that really deserve some protection here." To top of page

Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Index Last Change % Change
Dow 17,810.06 91.06 0.51%
Nasdaq 4,712.97 11.10 0.24%
S&P 500 2,063.50 10.75 0.52%
Treasuries 2.32 -0.02 -0.86%
Data as of 9:47am ET
Company Price Change % Change
Bank of America Corp... 17.12 0.12 0.71%
Kinder Morgan Inc 39.75 -0.17 -0.43%
Apple Inc 116.47 0.16 0.14%
Intel Corp 35.59 -0.36 -1.00%
Microsoft Corp 47.98 -0.72 -1.48%
Data as of Nov 21

Sections

This arrangement, announced Friday, illustrates how the lines have blurred between traditional TV networks and newfangled options like Netflix. More

The Obama administration is touting that its immigration action will boost wages. But the hike amounts to only $170 a year by 2024. More

Obama doesn't have the authority to create a startup visa, but part of his reform announcement could include a workaround for entrepreneurs: 'parole status.' More

Nearly half of all Americans say there's a chance they'll have to work during a holiday between Thanksgiving and New Year's, according to a new poll. And one in four say they'll have to work whether they want to or not. More

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.