Friday, June 4, 2010

Investors Paying for Rights to Madoff Recovery Funds

There are companies that will pay upfront for the rights to a settlement or recovery of a plaintiff's lawsuit. Other companies will loan money to a plaintiff to fund the lawsuit with no payment until the case settles or the plaintiff is victorious at trial. The Wall Street Journal is reporting that some investors are approaching victims of Mr. Madoff's Ponzi scheme, offering to buy them out at a discount for their claims to what is eventually recovered by the court appointed trustee who is gathering assets for Madoff victims.

One firm, ASM Capital, based in Woodbury, N.Y., is offering either to make an immediate payment of 20% of claims in exchange for the full claim; or make an upfront payment of 16% of the claims, with the investor keeping 33% of future recoveries. For those with claims less than $1 million, the payout could be slightly less. ASM often extends offers to vendors who have claims against companies that seek bankruptcy protection, though it also has purchased claims of investors in frauds.

Whether this offer is fair to an investor hinges on several factors which are unknown at this time. Most important are how much the trustee is likely to recover and how many investors will share in the recovery. So far, the trustee has collected $1.5 billion. But he is expected to recover at least $2 billion from the estate of Jeffry Picower, an investor in Mr. Madoff's scheme who died last fall. A lawyer for the trustee has said the trustee might be able to recover as much as $10 billion for investors.

As for the total amount of investor losses, the trustee has said they could top off at $20 billion or less. But litigation currently under way challenges the trustee's methodology determining which victims of Mr. Madoff should be entitled to claims. So far a court has affirmed the trustee's view, which yields a smaller pool. But, if he ultimately loses on appeal, the loss figure "will approach $60 billion," the trustee said in an interview. Given these factors, victims could see anywhere from around 50 cents on the dollar to less than 15 cents.

A copy of the Wall Street Journal article on this topic can be found here.

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