SECURITIES 

INVESTOR 

PROTECTION 

CORPORATION

Customer Outcomes 

in the Madoff 

Liquidation 

Proceeding

Report to Congressional Requesters

September 2012

GAO-12-991

United States Government Accountability Office

GAO
United States Government Accountability Office

Highlights of GAO-12-991, a report to 

congressional requesters 

September 2012

SECURITIES INVESTOR PROTECTION 

CORPORATION 

Customer Outcomes in the Madoff Liquidation 

Proceeding

Why GAO Did This Study

After the collapse of Bernard L. Madoff 

Investment Securities, LLC—a brokerdealer and investment advisory firm with 

thousands of individual and institutional 

clients—the Securities Investor 

Protection Corporation (SIPC), which 

oversees a fund providing up to 

$500,000 of protection to qualifying 

individual customers of failed securities 

firms, selected a trustee to liquidate the 

Madoff firm and recover assets for its 

customers. In March 2012, GAO issued 

GAO-12-414, which examined selection 

of the Trustee, his method for 

determining customer claims, and 

expenses of the liquidation, among 

other things. This report discusses 

(1) the extent to which account activity 

varied by type of Madoff customer, 

(2) the nature of claims filed, and 

rejected or approved, with the Trustee

for reimbursement of losses, (3) 

litigation and settlement activity the 

Trustee has pursued in seeking to 

recover assets for distribution to 

customers, and (4) the effect of the 

fraud on customers’ federal income tax 

liabilities. GAO reviewed transaction 

and claims data from the Trustee, 

lawsuits filed by the Trustee, IRS rules 

and guidance, and interviewed the 

Trustee, private sector tax experts, and 

officials from IRS, SIPC, and the 

Securities and Exchange Commission. 

What GAO Found

GAO’s analysis of Madoff account data shows that more than three-fourths of the 

firm’s customers were individuals and families (individuals). The remaining 

accounts were held by institutions, such as pension funds and charities. A higher 

proportion of accounts held by an individual (60 percent) were “net winners” 

based on their net equity position—meaning they had withdrawn more from their 

accounts than they had deposited—compared to accounts held by institutions 

(50 percent). Correspondingly, 40 percent of institutional accounts were “net 

losers” that had deposited more into their accounts than they had withdrawn, 

compared to 29 percent of individuals’ accounts that were net losers. However, 

individual and institutional accounts had similar deposit and withdrawal activity

from 1981 through 2008, including increased withdrawals immediately before the 

firm’s failure in December 2008. 

GAO’s analysis shows that the Trustee’s decisions to accept or reject claims 

were similar for individual and institutional account holders. Of the more than 

16,000 claims, about 66 percent were denied because the customers were not 

direct account holders of the Madoff firm, but instead had invested in funds or 

other vehicles that held accounts directly with the firm. For the remaining 

claimants who were directly invested, the Trustee generally used the customers’ 

net investment positions—that is, whether they were net winners or net losers—

to determine claims. In examining claims decisions by customer type, GAO found 

the Trustee denied claims filed by individuals and institutions determined to be 

net winners in similar proportions. Similarly, most claims filed by individuals or 

institutions determined to be net losers were allowed. 

The Trustee has been pursuing litigation to recover, or “claw back,” assets from 

net winner customers and others that can be used to reimburse customers that 

did not withdraw all of their principal investments. For those customers that 

withdrew fictitious profits—net winners—the Trustee has been pursuing more 

than 1,000 lawsuits to recover funds, as allowed under federal bankruptcy law 

and state law. In about 60 suits, the Trustee has sought more than fictitious 

profits, to include principal or other funds received, arguing the parties knew or 

should have known of the fraud. Thus far, the Trustee said he has recovered 

about $9.1 billion of the $17.3 billion in principal investments lost by customers 

who filed claims, including $8.4 billion from settlement agreements.

Because the Madoff fraud affects customers’ taxable income, it also affects tax 

collections by the Department of the Treasury. Under Internal Revenue Service 

(IRS) rules, Madoff customers can deduct lost principal and fictitious profits on 

which they paid taxes while holding their accounts. However, IRS does not 

maintain statistics on specific frauds or their impacts on tax collections, and the 

tax impact may be reduced because some taxpayers may not be able to fully use 

this tax relief, such as those that lack other income that can be offset by these 

deductions. Tax experts expressed concerns about the lack of clarity over how 

payments stemming from fraud-related avoidance actions filed by the Trustee will 

be treated for tax purposes. In response to a recommendation in a draft report 

that IRS provide guidance to help limit taxpayer errors resulting in over- or 

underpayment of taxes, the agency issued such guidance on September 5, 2012, 

in the form of “frequently asked questions” posted to its website. 

View GAO-12-991. For more information, 

contact A. Nicole Clowers at (202) 512-8678 

or clowersa@gao.gov 
Page i GAO-12-991 Securities Investor Protection Corporation

Letter 1 

Background 3

Individual Customers Tended to Be Net Winners, While 

Transaction Patterns for Individuals and Institutions Were 

Generally Similar 9

Trustee Denied Feeder Fund Investor Claims, and Decided 

Individual and Institutional Claims Similarly 14

Trustee Has Been Pursuing Hundreds of Lawsuits to Recover 

Assets 22

Effects of the Fraud on Income Tax Revenues Cannot Be 

Determined, and New Guidance on Clawbacks Could Reduce 

Taxpayer Errors 43

Agency and Third Party Comments and Our Evaluation 53

Appendix I Objectives, Scope, and Methodology 54

Appendix II Trustee Avoidance Actions and Other Claims 58

Appendix III Largest Madoff Accounts by Transaction Volume, Total Withdrawals, 

and Net Winnings 66

Appendix IV Details of Settlements by the Madoff Trustee 70

Appendix V GAO Contact and Staff Acknowledgments 74

Tables

Table 1: Legal Bases Trustee Can Use to Recover Funds from 

Customers and Others Involved in Ponzi Schemes 7

Table 2: Madoff Account Holder Types and Net Positions 10

Table 3: Status of Good Faith Litigation by Madoff Trustee, as of 

May 2012 24

Table 4: Ten Largest Good Faith Complaints by Madoff Trustee 

among GAO Sample, by Amount Sought 25

Contents
Page ii GAO-12-991 Securities Investor Protection Corporation

Table 5: Most Prevalent Bases on Which the Madoff Trustee Has 

Alleged Customers or Others Acted in Bad Faith 28

Table 6: Ten Largest Bad Faith Complaints by Madoff Trustee, by 

Amount Sought 30

Table 7: Key Allegations in Six Largest Feeder Fund Complaints by 

Madoff Trustee, by Amount Sought 32

Table 8: Settlement Agreements Reached by Madoff Trustee, by 

Category, as of July 2012 35

Table 9: Examples of Customer Circumstances among Hardship 

Applications Accepted and Denied 40

Table 10: Ten Largest Madoff Accounts by Transaction Volume 66

Table 11: Ten Largest Madoff Accounts by Total Withdrawals 67

Table 12: Ten Largest Madoff Accounts by Net Winnings 69

Table 13: Madoff Settlement Agreements of at Least $20 Million 71

Table 14: Key Provisions among Largest Madoff Settlements 72

Figures

Figure 1: Deposit and Withdrawal Activity for Madoff Customer 

Accounts, by Year and Account Holder Type, 1981 to 2008 12

Figure 2: Madoff Customers’ Withdrawals of Principal, by Year and 

Account Holder Type, 5 Years before 2008 Failure 13

Figure 3: Trustee’s Disposition of Claims Filed in Madoff Liquidation, 

as of April 2012 15

Figure 4: Trustee’s Disposition of Claims Filed in Madoff Liquidation, 

by Net Loser and Net Winner Status, as of April 2012 17

Figure 5: Trustee’s Disposition of Madoff Customer Claims, by 

Customer Type and Net Investment Status, as of April 2012 19

Figure 6: Number and Amount of Allowed Madoff Customer Claims, 

as of July 2012 21

Figure 7: Madoff Trustee Hardship Program Process and Outcomes, 

as of May 2012 39

Figure 8: Results of the Clawback Element of the Madoff Trustee’s 

Hardship Program, as of June 2012 41
Page iii GAO-12-991 Securities Investor Protection Corporation

Abbreviations

AMT Alternative Minimum Tax

CIO chief information officer

CPLR Civil Practice Law and Rules

DCL Debtor and Creditor Law 

FSM final statement method

IRS Internal Revenue Service

NIM net investment method

PACER U.S. Courts’ Public Access to Court Electronic Records

SEC Securities and Exchange Commission

SIPA Securities Investor Protection Act of 1970

SIPC Securities Investor Protection Corporation

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Page 1 GAO-12-991 Securities Investor Protection Corporation

United States Government Accountability Office 

Washington, DC 20548

September 13, 2012

The Honorable Scott Garrett

Chairman

Subcommittee on Capital Markets

and Government Sponsored Enterprises

Committee on Financial Services

House of Representatives

The Honorable Peter King

House of Representatives

The Honorable Carolyn McCarthy

House of Representatives

The Honorable Ileana Ros-Lehtinen

House of Representatives

After the collapse of Bernard L. Madoff Investment Securities, LLC—a 

broker-dealer and investment advisory firm with thousands of clients—in 

December 2008, thousands of customers found they had lost billions of 

dollars to a Ponzi scheme Madoff had run for years.1

The Securities Investor Protection Act of 1970 (SIPA) established 

procedures for liquidating failed broker-dealers. In a liquidation under 

SIPA, the trustee establishes a fund of customer property consisting of 

the cash and securities held by the broker-dealer on behalf of customers,

plus any assets recovered by the trustee, for distribution among 

customers. The actions of the trustee in carrying out a liquidation have 

direct effects for former customers who lost money, such as how much of 

Within days of the 

collapse, the Securities Investor Protection Corporation (SIPC), a 

nonprofit, nongovernmental membership corporation responsible for 

providing financial protection to customers of failed securities firms, 

designated a trustee—attorney Irving H. Picard (referred to as the Trustee 

throughout this report)—to oversee the liquidation of the Madoff firm and 

recover assets for the benefit of former customers.

 

1

A Ponzi scheme is an investment fraud that involves the payment of purported returns to 

existing investors from funds contributed by new investors.

 
 

Page 2 GAO-12-991 Securities Investor Protection Corporation

their losses the trustee can recover. There are also indirect effects—for 

example, losses and potential recoveries can affect customers’ tax 

liabilities, which in turn affect tax collections by the U.S. Treasury.

Because the Trustee’s activities affect thousands of customers, you 

asked us to examine a series of questions about his efforts to resolve the 

Madoff liquidation. We agreed to examine these issues in two reports. 

The first, issued in March 2012, examined selection of the Trustee, his 

method for determining customer claims, and expenses of the liquidation, 

among other things.2

For this report, we obtained and analyzed data from the Trustee, 

including information on deposits to and withdrawals from Madoff 

customer accounts from April 1981 to December 2008. We also analyzed 

Trustee data on claims customers made for reimbursement from 

proceeds of the firm’s liquidation and the determinations he reached on 

these claims. We examined lawsuits the Trustee has been pursuing and 

settlements he has reached with customers and others, including 

reviewing a randomly selected sample of 50 of the more than 1,000 cases 

filed seeking the return of fictitious profits, as allowed under federal and 

state law. We reviewed 29 publicly available cases from among 30 

actions in which the Trustee is arguing defendants knew or should have 

known about the fraud, referred to as “bad faith” cases. In addition, we 

reviewed the largest cases among 27 actions focusing on funds that 

invested customer money in Madoff accounts. We interviewed the 

Trustee and members of his law firm, as well as SIPC executives, and 

officials of the Securities and Exchange Commission (SEC), which has 

oversight authority for SIPC. We also interviewed four individuals with 

income tax expertise, including a law professor and three tax advisors 

who we selected based on their tax experience or publications related to 

This second and final report discusses (1) the extent 

to which account activity varied by type of Madoff customer; (2) the nature 

of claims filed, and rejected or approved, with the Trustee for 

reimbursement of losses; (3) litigation and settlement activity the Trustee 

has pursued in seeking to recover assets for distribution to customers; 

and (4) the effect of the fraud on customers’ federal income tax liabilities, 

including the effect on amounts that would have been due if investor 

losses had been based on customers’ reported final statement holdings.

 

2

See GAO, Securities Investor Protection Corporation: Interim Report on the Madoff 

Liquidation Proceeding, GAO-12-414 (Washington, D.C.: Mar. 7, 2012).
 

Page 3 GAO-12-991 Securities Investor Protection Corporation

tax issues. We reviewed Internal Revenue Service (IRS) guidance and 

interviewed IRS officials about tax treatment of fraudulent schemes like 

the Madoff case. We conducted this performance audit from March to 

September 2012 in accordance with generally accepted government 

auditing standards. Those standards require that we plan and perform the 

audit to obtain sufficient, appropriate evidence to provide a reasonable 

basis for our findings and conclusions based on our audit objectives. We 

believe that the evidence obtained provides a reasonable basis for our 

findings and conclusions based on our audit objectives.

SIPC’s mission is to promote confidence in securities markets by seeking 

to return customers’ cash and securities when a broker-dealer fails. SIPC 

provides advances for these customers up to the SIPA protection limits—

$500,000 per customer, except that claims for cash are limited to 

$250,000 per customer.3

SIPC finances the fund through annual assessments it sets for member 

firms, plus interest generated from its investments in Treasury notes. If 

the SIPC fund becomes, or appears to be, insufficient to carry out the 

purposes of SIPA, SIPC can borrow up to $2.5 billion from Treasury 

through SEC. That is, SEC would borrow the funds from Treasury and 

relend them to SIPC. According to SIPC senior management, recent 

demands on the fund, including from the Madoff case, together with a 

change in SIPC bylaws that increased the target size of the fund from $1 

billion to $2.5 billion, led SIPC to impose new industry assessments

totaling about $400 million annually. The assessments, equal to onequarter of 1 percent of net operating revenue, will continue until the $2.5 

billion target is reached, according to SIPC senior management. The new 

assessments replaced a flat annual assessment of $150 per member 

SIPA established a fund (SIPC fund) to pay for 

SIPC’s operations and activities. SIPC uses the fund to make advances 

to satisfy customer claims for missing cash and securities, including 

notes, stocks, bonds, and certificates of deposit. The SIPC fund also 

covers the administrative expenses of a liquidation proceeding (including 

costs incurred by a trustee, trustee’s counsel, and other advisors) when 

the general estate of the failed firm is insufficient.

 

3

The cash limitation amount is subject to potential adjustment for inflation every 5 years. 

According to SIPC, the $500,000 limit for securities, rather than the limit for cash, applied 

in the Madoff liquidation. At the start of the Madoff case, the cash protection limit was 

$100,000 per customer.

Background
 

Page 4 GAO-12-991 Securities Investor Protection Corporation

firm.4 Under the new levies, the average assessment for 2010 was 

$91,755 per firm, with a median of $2,095, according to SIPC.

SIPA authorizes SIPC to begin a liquidation action by applying for a 

protective order from an appropriate federal district court if it determines 

that one of SIPC’s member broker-dealers has failed or is in danger of 

failing to meet its obligations to customers and one or more additional 

statutory conditions are met.5

Under SIPA, the trustee must investigate facts and circumstances relating 

to the liquidation; report to the court facts indicating fraud, misconduct, 

mismanagement, or irregularities; and submit a final report to SIPC and 

others designated by the court. Also, the trustee is to periodically report to 

the court and SIPC on his or her progress in distributing cash and 

securities to customers. To the extent that it is consistent with SIPA, the 

proceeding is conducted pursuant to provisions of the Bankruptcy Code.

The broker-dealer can contest the 

protective order application. If the court issues the order, the court 

appoints a trustee selected by SIPC, or, in certain cases, SIPC itself, to 

liquidate the firm. While SIPC designates the trustee, that person, once 

judicially appointed, becomes an officer of the court. As such, the trustee 

exercises independent judgment and does not serve as an agent of SIPC.

Promptly after being appointed, the trustee must publish a notice of the 

proceeding in one or more major newspapers, in a form and manner 

determined by the court. The trustee also must see that a copy of the 

notice is mailed to existing and recent customers listed on the brokerdealer’s books and records, and provide notice to creditors in the manner 

 

4

The Dodd-Frank Wall Street Reform and Consumer Protection Act raised the potential 

minimum assessment that SIPC can generally charge member firms, basing it on a 

percentage of gross revenues from the firm’s securities business. Pub. L. No. 111-203, § 

929V(a), 124 Stat. 1868 (2010).

5

For SIPC to initiate a proceeding, at least one of the following other factors must exist: (1) 

the firm must be insolvent under the Bankruptcy Code or unable to meet its obligations as 

they become due; (2) the firm is subject to a court or agency proceeding in which a 

receiver, liquidator, or trustee has been appointed; (3) the firm is not compliant with 

applicable requirements under the Securities Exchange Act of 1934 or financial 

responsibility rules of SEC or financial self-regulatory organizations; or (4) the firm is 

unable to show compliance with such rules. In the smallest proceedings (in which, among 

other factors, the claims of all customers are less than $250,000), SIPC may directly pay 

customer claims without filing an application for a protective decree with a court and 

without the appointment of a trustee.

Liquidations under SIPA
 

Page 5 GAO-12-991 Securities Investor Protection Corporation

SIPA prescribes. Customers must file written statements of claims. The 

trustee’s notice includes a claim form, and also informs customers how to 

file claims and explains deadlines.

Once filed, the claims undergo various reviews, according to the Trustee. 

First, the Trustee’s claims agent reviews claims for completeness; if 

information is found to be missing, the claims agent sends a request for 

additional information. Second, the Trustee’s forensic accountants review 

each claim form, information from the Madoff firm’s records about the 

account at issue, and information submitted directly by the claimant. The 

Trustee uses the results of this review in assessing his determination of 

the claim. Finally, claims move to SIPC, where a claims review specialist 

provides a recommendation to the Trustee on how each claim should be 

determined. Once that recommendation has been made, the Trustee and 

trustee’s counsel review it, as well as legal or other issues raised 

previously. When the Trustee has decided on resolution of a claim, he 

issues a determination letter to the claimant.6

As of the start of 2012, the Trustee had received 16,519 customer claims 

in the Madoff proceeding, and reached determinations on all but two of 

them. According to SIPC, many Madoff customers were older. For 

example, according to Trustee information we reviewed on his hardship 

program (described later in this report), more than half of applicants were 

age 71 or older.7

In a liquidation under SIPA, amounts in the customer property fund 

generally are distributed to the failed firm’s customers according to the 

value of their account holdings, or “net equity.” SIPA generally provides 

the net equity amount is what would have been owed to the customer if 

the broker-dealer had liquidated all their “securities positions,” less any 

obligations of the customer to the firm.8

 

6

The letter also informs claimants of their right to object to the determination and how to 

do so. The bankruptcy court judge overseeing the liquidation rules on a customer’s 

objections after holding a hearing on the matter. Decisions of the bankruptcy court may be 

appealed to the appropriate federal district court, and then upward through the federal 

appellate process.

 In the Madoff case, if the Trustee 

7

This may not be representative of the entire Madoff customer population, but illustrates 

the age issue. Information is for individual applicants with reported ages. 

8

15 U.S.C. § 78lll(11). 

Determination of Madoff 

Customer Claims
 

Page 6 GAO-12-991 Securities Investor Protection Corporation

recovers less than the total amount of allowed claims, some claimants 

likely will receive only a portion of their allowed claims. The Trustee told 

us his goal is to recover the full amount, but that is not likely, given 

developments in litigation and decisions to settle cases.

In SIPA liquidations not involving fraud, trustees typically determine that 

the amounts owed to customers match the amounts shown on their final 

statements, in what is known as the “final statement method” (FSM). 

However, in cases involving fraud, amounts in customer accounts may 

not correspond to statement amounts. In the Madoff case, the Trustee 

determined that the securities positions shown on customer statements 

were fictitious. As a result, supported by SIPC and SEC, he decided to 

value each customer’s net equity according to the amount of cash 

deposited less any amounts withdrawn—a method known as the “net 

investment method” (NIM). Under NIM, Madoff claimants generally divide 

into two categories: “net winners,” who have withdrawn more than the 

amount they invested with the Madoff firm, and “net losers,” who have 

withdrawn less than they invested.

Some customers challenged the Trustee’s decision on valuing customer 

net equity, but two courts have considered the issue—the U.S. 

Bankruptcy Court for the Southern District of New York and the U.S. 

Court of Appeals for the Second Circuit—and each has affirmed the 

Trustee’s decision to use NIM. In June 2012, the U.S. Supreme Court 

declined to hear an appeal on the issue, thus concluding legal challenges 

to the Trustee’s decision.9

The Trustee has taken various steps to recover assets for distribution to 

former Madoff customers, including recovery of bank account balances and 

sale of the firm’s assets. In addition, the Trustee has filed hundreds of 

lawsuits known as “avoidance actions” or “clawbacks.” Avoidance powers 

enable a trustee to “avoid,” or set aside, certain transfers made by a 

debtor—here, the Madoff firm—prior to the bankruptcy filing, in order to 

 

9

For a fuller discussion of legal issues surrounding the Trustee’s decision to use NIM, and 

the appeals that followed the decision, see the legal appendix in GAO-12-414. For the 

Supreme Court’s denial, which came after our first report, see 654 F.3d 229 (2nd Cir. 

2011), cert. dismissed, 132 S. Ct. 2712 (U.S. June 4, 2012) (No. 11-968), cert. denied

2012 WL 396489 (U.S. June 25, 2012) (11-969), and cert. denied 2012 WL 425188 (U.S. 

June 25, 2012) (11-986). 

Efforts by the Trustee to 

Recover Assets for the 

Benefit of Customers
 

Page 7 GAO-12-991 Securities Investor Protection Corporation

recover transferred funds for the benefit of the estate. In pursuing these 

actions, a trustee can generally seek return of fictitious profits paid to 

investors, and in some cases, principal amounts withdrawn, for specified 

periods of time—90 days, 2 years, and 6 years preceding the filing. In 

doing so, the Trustee has available state statutes, common law claims, and 

federal bankruptcy law upon which to build his cases. Actions also can vary 

according to whether the Trustee alleges a customer acted in good or bad 

faith. Under the Bankruptcy Code, a recipient’s good faith or bad faith is not 

relevant to whether the transfer is avoidable but does affect the extent of 

the recipient’s liability. Table 1 summarizes the legal avenues available. A 

fuller discussion of legal remedies available can be found in appendix II.

Table 1: Legal Bases Trustee Can Use to Recover Funds from Customers and Others Involved in Ponzi Schemes

Legal action and authority

Payments and periods 

covered

Potential liability

Good faith recipients Bad faith recipients

Preferential transfer avoidance

Bankruptcy Code § 547

Transfers 90 days prior to 

bankruptcy filing, except 1 year 

from filing for transfers to 

“insiders” 

Principal amounts 

invested

Principal amounts 

invested

Fraudulent transfer avoidance: constructive

fraud

Bankruptcy Code § 548(a)(1)(B)

Transfers 2 years prior to filing Fictitious profits Fictitious profits and 

principal

Fraudulent transfer avoidance: actual fraud

Bankruptcy Code § 548(a)(1)(A)

Transfers 2 years prior to filing Fictitious profits Fictitious profits and 

principal

Fraudulent transfer avoidance: constructive

fraud

Bankruptcy Code § 544(b)

New York Debtor and Creditor Law (DCL) §§ 

273-275

New York Civil Practice Law and Rules (CPLR) 

§ 213(1) 

Transfers 6 years prior to filing Fictitious profits Fictitious profits and 

principal

Fraudulent transfer avoidance: actual fraud

Bankruptcy Code § 544(b)

DCL § 276

CPLR §§ 203(g), 213(8)

Transfers 6 years prior to filing, 

or potentially earlier depending 

on timing of discovery of fraud

Fictitious profits Fictitious profits and 

principal

Common law claims: e.g., conversion, unjust 

enrichment

Bankruptcy Code §§ 323, 541

Common law principles as applicable

Period covered depends on 

nature of claim asserted

N/A Damages, depending 

on nature of claim

Source: GAO summary of federal bankruptcy, New York state law. 
 

Page 8 GAO-12-991 Securities Investor Protection Corporation

Generally, transfers are avoidable as actually fraudulent if the debtortransferor had intent to defraud; or, as constructively fraudulent if they 

were made without fraudulent intent but for less than equivalent or fair 

value, while the debtor was insolvent. Courts generally presume Ponzi 

scheme payouts to be actually fraudulent. As for constructive fraud, Ponzi 

scheme transfers in excess of principal are not made for value—meaning 

they are not paid to satisfy any legitimate obligation the debtor owed to 

the recipient—and thus fall within the constructive fraud provisions.10

 

10In addition to the facts of each case, actual liability will depend on legal issues such as 

the applicability of the “stockbroker safe harbor” (Bankruptcy Code § 546(e)), the 

standards used to determine good faith, and the extent of the trustee’s standing to bring 

common law claims.
 

Page 9 GAO-12-991 Securities Investor Protection Corporation

In our analysis of information obtained from the Trustee, we identified 

7,994 accounts with at least one transaction. We examined names on 

each of these accounts, to determine whether individuals and families (to 

which we refer jointly as individuals) or institutions held the accounts.11

We found that individuals held more than three-fourths (77 percent) of 

accounts, while almost one-quarter (23 percent) of accounts were held by 

institutions, such as charities, pension funds, and feeder funds.12 Using 

these groupings, we further examined the account holders’ claims 

outcomes—whether they were net winners or net losers—and the pattern 

of their transactions leading up to the Madoff firm’s collapse.13 The 

Trustee, however, noted that accounts held by institutions generally 

represented funds from individuals as well, because with the exception of 

funds from nonprofit organizations, the institutions were investing money 

on behalf of individuals. The Trustee said that based on his examination, 

he was not aware of any direct corporate investment in the Madoff firm.

As shown in table 2, our analysis indicates that a higher proportion of 

accounts held by individuals (60 percent) were net winners that had 

withdrawn more than they had deposited over the lifetime of their 

accounts, compared to accounts held by institutions (50 percent). We 

 

11We classified more than 99 percent of accounts based on account names. See 

appendix I for more information about our methodology and the accounts we could not 

classify. SEC officials told us that Madoff urged smaller investors to pool funds with 

others, such as friends or relatives, to increase account size. They said this may help 

explain the number of entities such as trusts or partnerships that were among the firm’s 

customers. We use “family” to include family partnerships and trusts, of which there were 

many, according to the Trustee. 

12Feeder funds are investment vehicles that collected money from investors and 

channeled the funds to the Madoff firm. We describe Trustee litigation against feeder 

funds later in this report.

13In the analysis presented in this section and elsewhere, we relied on our own 

examination of data provided by the Trustee. The Trustee reviewed our results, noting 

some small differences between our review and his work, but generally confirming our 

findings. Upon further review of our work, we determined that the variances arose from 

differing methodologies and particular algorithms used to conduct the analysis. For 

example, we excluded from our analysis accounts that had no transactions, and we 

counted multiple allowed claims for one account as a single allowed claim. Further, in 

determining whether accounts were net winners or net losers, we summed all applicable 

deposits and withdrawals to determine net positions. In a small number of cases, this 

produced very small negative or positive account balances, which we considered to be 

different than zero. 

Individual Customers 

Tended to Be Net 

Winners, While 

Transaction Patterns 

for Individuals and 

Institutions Were 

Generally Similar

Accounts Held by 

Individuals Tended to Be 

Net Winners
 

Page 10 GAO-12-991 Securities Investor Protection Corporation

also found that more institutional accounts (40 percent) were net losers 

than were individual accounts (29 percent). Among individual accounts, 

net winners outnumbered net losers by 2-to-1, with outcomes split more 

evenly for institutional accounts. Overall, for both categories combined, 

we found that 57 percent of account holders were net winners. About 

one-third (32 percent) were net losers, whose total withdrawals were less 

than their total investment deposits. The remaining 11 percent of 

accounts had zero balances from a net investment perspective, with 

account holders having withdrawn exactly what they had invested.

Table 2: Madoff Account Holder Types and Net Positions

(Dollars in millions) 

 

Account holder type

Individual/family Institution

Number of 

accounts

Percentage of 

all accounts of 

this type

Net investment 

position 

Number of 

accounts

Percentage of 

all accounts of 

this type

Net investment 

position

Net losers 1,810 29% $5,135 725 40% $14,790 

Net winners 3,667 60 ($5,902) 910 50 ($11,824)

Zero balance 675 11 $0 177 10 $0 

Total 6,152 100 ($767) 1,812 100 $2,965 

Source: GAO analysis of Madoff Trustee data.

Notes: Positive net investment positions represent deposits in excess of withdrawals; negative net 

investment positions indicate withdrawals in excess of deposits. Numbers may not sum to totals 

shown due to rounding. 

Table 2 also shows that as a group, institutional accounts lost principal 

amounts they invested in the fraud, while accounts owned by individuals in 

the aggregate withdrew more than they invested. For individuals, the total 

net investment position at the time of the Madoff firm’s failure was ($767 

million), meaning they had withdrawn more money than they originally 

invested. As a result, individual account holders as a group were net 

winners. By contrast, the total net investment position for institutional 

accounts as a group showed that they were net losers, having made nearly 
 

Page 11 GAO-12-991 Securities Investor Protection Corporation

$3.0 billion more in deposits than withdrawals.14 We note that while we 

divided the population into account types for analytical purposes, the 

Trustee and SIPC executives stressed that each customer claim was 

determined on a case-by-case basis without regard to whether the account 

holder was an individual or institution.15 In addition, SIPC executives noted 

that notwithstanding the overall totals for the two customer categories, 

there were nevertheless both net winners and net losers in each grouping.

Our analysis found that individual and institutional accounts had similar 

deposit and withdrawal activity throughout the 27-year period we 

examined, including during the period immediately before the failure in 

2008. For both groups, total annual deposits and total annual withdrawals 

increased steadily since 1981, growing by greater amounts in more recent 

years.16

 

14We note the effects of one large account—Decisions, Incorporated, an institutional 

account used by Jeffry Picower. As part of a settlement, the Trustee is recovering all of 

the about $6.2 billion in net winnings for this account. If that account is excluded from the 

analysis, then the total net investment position for institutional accounts would increase 

from about $3.0 billion to about $9.1 billion. The settlement recovers a total of $7.2 billion, 

covering multiple Picower accounts. 

Overall, deposit volume more than doubled between 2005 and 

2007, rising from $4.5 billion to $9.4 billion annually. Withdrawal volume 

grew more slowly from 2005 to 2007, rising only about 14 percent, from 

$5.7 billion to $6.4 billion. However, withdrawal volume in 2008, at $12.6 

billion, was almost double the volume in 2007. Figure 1 breaks out total 

deposit and withdrawal activity by individual and institutional accounts. As 

noted, the pattern of activity is similar for each group, except that deposit 

volume for individual accounts was about the same in 2007 and 2008, at 

$3.4 billion annually, while deposit volume from institutional accounts fell 

between 2007 and 2008, from $6.0 billion to $5.1 billion.

15According to SIPC executives, criteria for evaluation included whether the claimant: had 

an account; withdrew more than the amount deposited; and had knowledge of the fraud, 

or should have had knowledge of the fraud.

16We excluded one account (among the accounts owned by Norman F. Levy) from our 

analysis in this section because its transaction history varied significantly from other 

accounts. Trustee data show this account had 64,000 transactions and $222 billion in 

transaction volume (the sum of deposits and withdrawals). The next largest account by 

volume had volume of $9 billion. At the time of the failure, this Levy account had a net 

investment position of only ($61 million), however, and a final statement amount of $0. As 

discussed later in this report, the Trustee reached a settlement to recover fictitious profits. 

Individual and Institutional 

Accounts Had Similar 

Patterns of Deposits and 

Withdrawals
 

Page 12 GAO-12-991 Securities Investor Protection Corporation

Figure 1: Deposit and Withdrawal Activity for Madoff Customer Accounts, by Year and Account Holder Type, 1981 to 2008

Our analysis also showed that in the final year of the Madoff firm’s 

existence (2008), both individuals and institutional account holders 

withdrew large amounts of principal they had invested. Figure 2 shows 

such principal withdrawals, excluding any fictitious profits, during quarterly 

periods leading up to the failure. Withdrawals of principal began to 

increase three quarters before the failure, with most of the increase in 

withdrawals occurring in the 90 days before the Madoff firm’s failure. 

Under his clawback authority, described earlier, the Trustee can, among 

other things, seek to recover principal withdrawals during this period.
 

Page 13 GAO-12-991 Securities Investor Protection Corporation

Figure 2: Madoff Customers’ Withdrawals of Principal, by Year and Account Holder Type, 5 Years before 2008 Failure

a

“Quarters” refers to successive 90-day periods preceding failure. 

Accounts that had large withdrawals, particularly those made just before 

the Madoff firm’s collapse, could suggest that such customers knew of the 

fraudulent scheme and were attempting to avoid suffering losses when 

the firm failed. Although the increase in withdrawals we identified during 

the period preceding collapse could suggest some customers anticipated 

the firm’s failure, this activity may also have been due to investor 

reactions to the financial crisis, which was peaking at the time, or to other 

factors affecting where investors place their money. As we describe later, 

the Trustee has filed extensive litigation to recover withdrawals that many 

customers made. In appendix III, we show other results of our analysis, 

listing the largest Madoff accounts by transaction volume, total 

withdrawals, and net winnings.
 

Page 14 GAO-12-991 Securities Investor Protection Corporation

As required by SIPA, the Trustee solicited claims from Madoff customers 

for reimbursement of their losses, with approved claimants eligible to 

receive a share of any cash or securities Madoff held on behalf of his 

customers, plus assets recovered by the Trustee during the liquidation 

proceeding. According to claims data provided by the Trustee, a total of 

16,519 claims were filed. As shown in figure 3, most of the claims were 

denied. Sixty-six percent of the claims were denied because the filers had 

not invested directly with the Madoff firm themselves (referred to as “third 

party” denials). Instead, they had invested in feeder funds or other 

vehicles that owned the accounts at the firm. The Trustee determined that 

under SIPA, only those who had invested directly with the Madoff firm 

were customers for claims purposes.17

 

17The Trustee denied claims from feeder fund investors, determining that although the 

feeder funds themselves qualified as Madoff customers under SIPA, the feeder fund 

investors did not. The investors contested that determination, and in June 2010, the 

Trustee filed a motion with the Bankruptcy Court requesting an order upholding his denial 

of the investors’ claims. In June 2011, the Bankruptcy Court granted the Trustee’s motion, 

Securities Investor Protection Corp. v. Bernard L. Madoff Inv. Securities LLC, 454 B.R. 

285 (Bankr. S.D.N.Y. 2011), after which the investors appealed. In January 2012, the U.S. 

District Court for the Southern District of New York affirmed the Bankruptcy Court’s ruling. 

In re Aozora Bank Ltd., 2012 WL 28468 (S.D.N.Y. 2012). The case is on appeal to the 

U.S. Court of Appeals for the Second Circuit. SEC and SIPC supported the Trustee’s 

determination.

Trustee Denied 

Feeder Fund Investor 

Claims, and Decided 

Individual and 

Institutional Claims 

Similarly
 

Page 15 GAO-12-991 Securities Investor Protection Corporation 

Figure 3: Trustee’s Disposition of Claims Filed in Madoff Liquidation, as of April 2012 

Notes: “Other” category consists of: claims withdrawn; claims not yet determined; and claims 

determined to be no claim, because they lacked necessary information or did not claim an amount. 

“Deemed determined” means subject to litigation with the Trustee. 

Among 5,543 claims from direct investors remaining after denial of the 

third party claims, the Trustee denied 2,703 claims (16 percent of all 

claims). Almost all of the denied claims were from net winners, meaning 

that they had withdrawn more money than they invested. The Trustee 

allowed 2,425 claims (15 percent of all claims), totaling $7.3 billion.18 Of 

the allowed claims, the majority were filed by net losers, meaning they 

had withdrawn less from their account than they had invested. Figure 4 

details the Trustee’s disposition of claims, by net winner and loser status. 

However, there were exceptions to the general pattern of approvals and 

denials by net investment status. For example, 10 (less than 1 percent of 

all claims) net winner claims were allowed. According to the Trustee, in 

some cases, these claims were allowed because the account holders 

repaid certain withdrawals made from their accounts, and when they 

 

18SIPC is paying $889 million in advances on these claims, according to SIPC. These 

advances will be counted against allowed claims when claims are paid. 
 

Page 16 GAO-12-991 Securities Investor Protection Corporation

returned those funds, they became eligible for an allowed claim.

19

 

19Under the formula the Trustee is using, claim eligibility is based on a customer’s net 

investment (total investments less withdrawals) plus any repayments of withdrawals of 

principal the Trustee has obtained as part of his efforts to recover assets.

In other 

instances, net winner claims were allowed when combined with net loser 

account(s) held by the same party. The Trustee also denied seven net 

loser claims, most often because the account was combined with net 

winner account(s) held by the same party.
 

Page 17 GAO-12-991 Securities Investor Protection Corporation

Figure 4: Trustee’s Disposition of Claims Filed in Madoff Liquidation, by Net Loser and Net Winner Status, as of April 2012

Notes: “Other” category consists of: claims withdrawn; claims not yet determined; and claims 

determined to be no claim, because they lacked necessary information or did not claim an amount. 

“Deemed determined” means subject to litigation with the Trustee. 
 

Page 18 GAO-12-991 Securities Investor Protection Corporation

Our analysis of the Trustee’s data shows that his acceptance or denial of 

claims was similar for both individual and institutional accounts, given 

account holders’ net investment position.

20 Figure 5 shows a breakdown 

of claims outcomes, by account type and net investment status. As the 

figure shows, 98 percent and 94 percent of claims filed by individuals and 

institutions, respectively, who were determined to be net winners were 

denied—with 5 percent of the institutional net winner claims being 

withdrawn before final determination—so that disposition of both types 

was therefore almost identical. Similarly, most claims filed by individuals 

or institutions that were determined to be net losers were allowed or 

deemed determined (that is, subject to litigation with the Trustee).21

 

20As SIPC executives told us, in a SIPA liquidation, each account holder with an approved 

claim receives the same pro-rated share of customer property, regardless of whether they 

are an individual or an institution. Institutions generally receive more in total payments, but 

only because they invested, and lost, more principal.

21SIPC executives told us they confirmed all of the Trustee’s claim determinations, in 

order that subsequent distributions based on the claims decisions would be accurate.
 

Page 19 GAO-12-991 Securities Investor Protection Corporation

Figure 5: Trustee’s Disposition of Madoff Customer Claims, by Customer Type and Net Investment Status, as of April 2012

a

Percentages are rounded; categories with values less than 1 percent are not shown. 

Notes: “Other” category consists of: claims withdrawn; claims not yet determined; and claims 

determined to be no claim, because they lacked necessary information or did not claim an amount. 

“Deemed determined” means subject to litigation with the Trustee. 
 

Page 20 GAO-12-991 Securities Investor Protection Corporation

We also found that some net losers who would otherwise appear to be 

eligible for a claim approval did not file claims. In particular, we identified 

197 net loser accounts (less than 3 percent of all accounts) that did not 

file. The Trustee told us such customers may not have filed claims for 

several reasons:

• The accounts may be owned by a person or entity that also has 

accounts that were larger net winners.

• The accounts may have been subject to settlements that affected 

claims.

• Some account holders may simply have not thought it worthwhile to 

file a claim.

• Some account holders thought filing a claim would call attention to 

themselves, which they wanted to avoid. Similarly, some foreign 

account holders might not have wanted their government to know they 

had an account in the United States for tax or other reasons, and may 

have believed that filing a claim would increase the likelihood that 

their government would find out about the account.

Finally, our analysis of the Trustee data shows that while most allowed 

claims were for less than $1 million, a small number of large claims 

account for more than half of the total amount of all approved claims. As 

shown in figure 6, 1,127 allowed claims—each for less than $1 million—

account for 54 percent of claims allowed. The total value of these claims 

is about $380 million, or about 5 percent of all allowed claim amounts. In 

contrast, the Trustee allowed 93 claims for $10 million or more each. 

Although these claims represent about 4 percent of all allowed claims, the 

total value of these claims is $4.5 billion, or 61 percent of all allowed claim 

amounts. The accounts with the largest allowed claims were $1.57 billion 

for Optimal Multiadvisors, a Geneva-based hedge fund of Spanish 

banking corporation Banco Santander, and $741 million for M-Invest 

Limited, a feeder fund created by Swiss bank Union Bancaire Privee.22

 

22Both of these accounts were large net losers. The Optimal account related to the claim 

lost $1.44 billion of principal, and M-Invest lost $541 million of principal. The difference 

between the allowed claim amount and the lost principal is due to repayment of certain 

withdrawals through settlements, which subsequently increased the allowable claim 

amount. As noted earlier, the Trustee generally denied claims from feeder fund 

customers, but feeder funds themselves were eligible to file claims as direct Madoff 

investors. 
 

Page 21 GAO-12-991 Securities Investor Protection Corporation

The remaining allowed claims were all for less than $300 million each. 

We also examined the distribution of claim size by customer type—

individual and institutional accounts—and found generally similar results. 

Although the distributions were not identical to the overall pattern, the 

same results generally held for each customer type, with each group 

having relatively more lower-value claims and relatively fewer highervalue claims.

Figure 6: Number and Amount of Allowed Madoff Customer Claims, as of July 2012

Note: Amounts shown reflect allowed claims plus amounts resulting from claims deemed determined 

through litigation. 
 

Page 22 GAO-12-991 Securities Investor Protection Corporation

The Madoff Trustee is pursuing various litigation to recover assets from 

customers and others that can be used to reimburse those customers that 

have allowable claims under SIPA.23 For those customers that withdrew 

fictitious profits in excess of their investments—net winners—the Trustee 

is pursuing more than a thousand lawsuits to recover these funds as 

allowed under federal bankruptcy law and state law. The Trustee is also 

suing some individuals and entities that he argues knew or should have 

known about the fraud and from whom he is seeking to recover more than 

just fictitious profits. In addition, the Trustee has filed other actions 

involving feeder funds. Through such efforts, the Trustee has obtained 

billions of dollars in settlement agreements with customers that either 

faced the possibility of litigation or had been sued already.24 However, the 

Trustee established a hardship program, in which he expedited claims 

processing or declined to pursue litigation for individuals who could 

demonstrate financial distress.

As discussed earlier, various laws grant authority to the Trustee to seek 

return of funds paid out by the Madoff firm. This includes federal 

bankruptcy and state laws, which allow actions to return transfers from the 

failed entity—the debtor—made in different periods of time, including within 

90 days, 2 years, or 6 years prior to the bankruptcy filing. In deciding 

whether to bring an action, the Trustee told us that he has generally 

considered the same factors as would apply in a typical bankruptcy case or 

those that a private plaintiff would also likely consider. In particular, the 

Trustee said he has considered the costs and benefits of taking the 

action—that is, how much could be recovered and at what cost—as well as 

prospects for success and potential legal barriers, such as the statute of 

limitations.

While the overall goal of an action is to recover a reasonable amount for 

the customer property fund, the Trustee also told us that when filing an 

action, he might not seek all possible assets. Many former account 

 

23According to the Trustee, through August 2012, $1.1 billion had been distributed to 

customers, with an additional $2.4 billion expected by September 2012.

24In addition to seeking recoveries through litigation efforts described here, the Trustee 

has also recovered other assets for the benefit of customers, including approximately 

$500 million in bank accounts and about $300 million in securities, he told us. The Trustee 

has also sold Madoff corporate assets. Thus far, the Trustee said total recoveries are 

about $9.1 billion.

Trustee Has Been 

Pursuing Hundreds of 

Lawsuits to Recover 

Assets

Trustee’s Authority and 

Approach to Litigation
 

Page 23 GAO-12-991 Securities Investor Protection Corporation

holders were older and renting their homes, he said. At the same time, 

some customers have assets that are protected against judgments, such 

as homes or pension assets, which reduces the amount of assets he can 

pursue. The Trustee told us that while the amount of potential recoveries 

is important, he has not established any minimum amount in deciding 

whether to sue. The underlying decision on whether to sue, he said, is the 

acknowledgment that each time he declines to pursue an action, he 

allows a customer who withdrew more than their principal invested to 

keep money taken from others who had not recovered as much as they 

had invested.

According to information the Trustee provided, his litigation has targeted a 

high portion of amounts withdrawn from the firm during the periods 

preceding failure for which he is legally authorized to pursue recoveries. 

For example, the total amount withdrawn from the Madoff firm during the 

90-day period under which federal bankruptcy law allows recoveries was 

$5.5 billion, he said. Of that, his lawsuits have sought $5.2 billion, or 95

percent. The total amount withdrawn under the 2- and 6-year recovery 

periods allowed by federal and state law was $9.7 billion. Of that, the 

Trustee has sought $8.4 billion, or 87 percent, he said. According to the 

Trustee, the differences between amounts withdrawn and sought are 

based on consideration of the factors whether to sue as noted earlier, as 

well as having reached settlements to return funds prior to filing of an 

action.25

According to our review, the Trustee has filed 1,002 actions seeking to 

recover $3.5 billion from Madoff customers that were net winners but that 

are not alleged to have had knowledge of the fraud or been in a position 

to know about it—referred to by the Trustee as “good faith” defendants.

According to the Trustee, the good faith designation indicates that while 

defendants profited from the fraud, he did not have evidence they had 

knowledge of the scheme or were in a position to know about it. When 

bad faith is not alleged, the laws providing the Trustee with the ability to 

recover funds allow him to seek principal withdrawn during the 90 days 

preceding the Madoff firm’s failure—the preference period—plus fictitious 

 

25In the descriptions of Trustee litigation that follow, we have summarized the Trustee’s 

complaints, but not sought to independently verify allegations or obtain the views of any 

defendants.

The Trustee Has Filed 

Hundreds of Actions to 

Recover Excess 

Withdrawals from 

Customers Not Claimed to 

Have Known of the Fraud
 

Page 24 GAO-12-991 Securities Investor Protection Corporation

profits withdrawn in the 6 years prior to the failure.26 The Trustee told us 

that although he anticipated negative publicity from filing suits against 

customers who did not know about the fraud, the $3.5 billion at issue in 

the good faith cases was an amount too large to ignore.27

Some of the good faith cases have settled, but about 88 percent of 

complaints remained in litigation or were on appeal as of May 2012, 

according to information we obtained from the Trustee.

In these good 

faith cases, the amounts sought by the Trustee range from a low of 

$33,000 to a high of $152 million. The average amount sought was $3.5 

million, with the median at $1.4 million.

28

Table 3: Status of Good Faith Litigation by Madoff Trustee, as of May 2012

Table 3 

summarizes the status of the good faith cases. In general, most good 

faith cases are proceeding slowly, with the Trustee seeking to mediate 

and settle them, he told us.

Status of case

Number of 

cases

Percentage of

cases

In litigation 709 70.8%

Some defendants dismissed and case not dismissed 176 17.6

Othera 59 5.9

All defendants dismissed and case closed 57 5.7

In litigation/on appeal 1 0.1

Total 1,002 100

Source: GAO analysis of Madoff Trustee data.

a

”Other” is comprised of these categories: “All defendants dismissed and case not closed,” “All 

defendants settled and dismissed and case closed,” “All defendants settled but not dismissed and 

case not closed,” and “Some defendants settled and dismissed and case not closed.” 

 

26The failure date is December 11, 2008. SIPC filed its application for liquidation on 

December 15, 2008, and the district court issued a protective decree that began the SIPA 

liquidation proceeding against Madoff and his firm. 

27In some cases, the Trustee’s first contact with account holders has been the filing of 

these complaints. This followed attempts, early on in the case, to reach out to some 

account holders, to learn more about their situations, the Trustee told us. However, the 

reaction was negative, with complaints of invasion of privacy. Thus, the Trustee said he 

ceased those efforts. 

28The latest available data from the Trustee at the time of our review were as of May 

2012. 
 

Page 25 GAO-12-991 Securities Investor Protection Corporation

We examined a random sample of 50 good faith cases and found them to 

be similarly structured and generally citing the same federal and state 

laws as grounds for recovery. The good faith actions generally include the 

name of the defendants, their account numbers, the amounts sought, and 

the legal basis on which the Trustee relied to seek recovery. In several 

filings, the Trustee also included an accounting of deposits and 

withdrawals. In contrast to a bad faith action, the good faith complaints we 

reviewed generally do not include narrative details of the defendant’s 

history or relation to the Madoff firm. Table 4 summarizes the 10 largest 

actions in our sample, by amount sought.

Table 4: Ten Largest Good Faith Complaints by Madoff Trustee among GAO Sample, by Amount Sought

Case

Amount 

sought Type of defendant(s) Status 

1096-1100 River Road Associates, 

LLC

$52,907,751 Trust, individual, limited liability company Some defendants dismissed 

and case not closed

The 1995 Jack Parker Descendant 

Trust No. 1 

$48,808,407 Trust, individual In litigation

Robert L. Silverman $30,490,003 Individual, corporation, other In litigation

RAR Entrepreneurial Fund LTD $17,000,000 Partnership, corporation, individual In litigation

GMR S.A. $13,172,507 Corporation In litigation

The Mosaic Fund, L.P. $12,696,347 Partnership, individual In litigation

Shum Family Partnership III, LP $10,000,000 Partnership, corporation In litigation

Bell Ventures Limited $7,400,064 Individual, other In litigation

MBE Preferred Limited Partnership $4,860,000 Partnership, trust, individual, limited 

liability company 

In litigation

Trust created under agreement 1/9/90 

by Leonard Litwin 

$4,588,818 Trust, individual In litigation

Source: GAO review of random sample of 50 Madoff Trustee case filings.

The Trustee has pursued a variety of legal approaches in the cases we 

sampled. Thirty-eight cases cited the 2-year period provided in the federal 

bankruptcy statute, while 48 cases cited the 6-year period. In six of the 

cases, the Trustee sought to recover transfers from the 90-day 

preference period. In 20 of the 50 cases, the Trustee also sued to recover 

funds he alleged were transferred from defendants to third parties, known 

as “subsequent transferees.” For instance, in one case, the Trustee 

alleged that an individual account holder transferred to a relative some or 

all of $1.2 million in fictitious profits withdrawn. Additionally, in five cases, 

the Trustee has also sought to temporarily disallow customer claims filed 

by defendants. For example, one limited liability company filed a claim for 

SIPC coverage in May 2009, and the Trustee filed suit to recover funds in 
 

Page 26 GAO-12-991 Securities Investor Protection Corporation

December 2010. As part of the action, the Trustee sought to disallow the 

SIPC claim until $4 million was recovered for the Madoff estate.

In one good faith case in our sample, the defendant was Madoff’s 

nephew, considered an insider, and had received fraudulent transfers, but 

was not deemed to have acted in bad faith. Specifically, according to the 

Trustee, the nephew worked full-time at the Madoff firm beginning in 

1980, most recently as director of administration. The Trustee alleged he 

received preference transfers, fictitious profits, and improperly used 

Madoff firm funds to pay for personal expenses. However, the Trustee 

told us his investigation indicated the relative was not likely aware of the 

fraud.

In addition to the good faith lawsuits, the trustee has also filed 30 actions 

against individuals or entities in which he has alleged the defendants 

acted in bad faith because they either knew, or should have known, of 

Madoff’s fraudulent investment scheme.29 According to the Trustee, 

asserting that a defendant acted in bad faith allows him to potentially 

recover greater amounts than in other actions. For example, in a bad faith 

action, a trustee can seek to recover not only fictitious profits, but also 

seek principal amounts invested as well. Additionally, while New York 

debtor and creditor law generally limits to 6 years the period for which a 

trustee can seek recovery from parties that received funds from a 

bankrupt entity, a trustee can sue a customer that acted in bad faith in 

earlier years, if it can be shown the defendant knew or should have 

known of the fraud and certain other conditions are met. The trustee can 

also pursue common law claims such as conversion and unjust 

enrichment against bad faith defendants that received other funds from 

the bankrupt entity, such as receiving cash or purchases of goods on their 

behalf.30

 

29In addition to these cases, the Trustee is also pursuing bad faith litigation involving 

feeder funds, which we describe later in this report.

 Common law claims allow the Trustee to seek compensatory 

damages to recover sums allegedly received improperly by the 

defendant. However, although the Trustee has the authority and standing 

to enforce common law claims, two recent judicial decisions dealing

30Common law is the body of law derived from judicial decisions, rather than from statutes 

or constitutions. It is sometimes also referred to as case law. Conversion is the wrongful 

possession or disposition of another’s property. Unjust enrichment is the retention of a 

benefit conferred by another, without appropriate compensation. 

In Some Asset Recovery 

Actions, the Trustee Has 

Alleged That Defendants 

Knew or Should Have 

Known of the Fraud
 

Page 27 GAO-12-991 Securities Investor Protection Corporation

specifically with the Madoff liquidation limited his ability to pursue 

common law claims.31

Our review of the 30 bad faith actions showed that the complaints list 

several hundred defendants and seek $11 billion overall, with demand 

amounts ranging from more than $500,000 to approximately $6.7 billion.32

Defendants include Madoff family members, employees of the Madoff 

firm, individuals who identified investors for Madoff, and other business 

associates of Madoff. In addition to suing defendants as individuals, the 

complaints also seek to recover funds from vehicles these individuals 

used to invest in the Madoff scheme, including corporations, limited 

partnerships, trusts, estates, partnerships, foundations, and profit-sharing 

plans. Additionally, the Trustee is suing individual retirement accounts, to 

recover funds allegedly received from another defendant. According to 

the Trustee, his objective in alleging bad faith, even for some net loser 

defendants, is to maximize recoveries for distribution to other harmed 

customers.33

The Trustee has cited various factors in arguing that the defendants in the 

bad faith cases knew or should have known of the Madoff fraud. These 

factors include being an employee or officer of the Madoff firm, and acting 

to perpetuate the fraud or being in a position that should have allowed 

them to identify it. For example, among bad faith defendants is the 

manager of the Madoff computer system that generated falsified 

transactions and customer statements. The Trustee is also suing Madoff’s 

brother, who was the firm’s chief compliance officer, whose duties were to 

ensure the firm was complying with applicable laws. Other individuals 

being sued for bad faith include those who had close enough access to 

either Madoff or his firm that they could or should have made inquiries 

 

31The cases are Picard v. JP Morgan Chase & Co., 460 B.R. 84 (S.D.N.Y. 2011), and 

Picard v. HSBC Bank PLC, 454 B.R. 25 (S.D.N.Y. 2011). See appendix II for details. 

32Twenty-nine of the 30 bad faith complaints are available publicly, either through the U.S. 

Courts’ Public Access to Court Electronic Records (PACER) system or the trustee’s 

website, http://www.madofftrustee.com. One bad faith complaint is under seal and 

unavailable. According to the trustee, this complaint involves a husband and wife as 

defendants and is sealed because it includes allegations about the defendants’ federal 

income taxes.

33In addition to the bad faith actions described here, the Trustee has also filed separate 

bad faith actions to recover funds received by “subsequent transferees”—third parties who 

received funds paid to them by Madoff customers. 
 

Page 28 GAO-12-991 Securities Investor Protection Corporation

that could have revealed the Ponzi scheme. In some instances, the 

Trustee alleges that defendants were also sophisticated investors with 

sufficient education or specialized work experience in securities law, 

accounting, or finance that they should have known their returns were 

unusual. Table 5 shows the most frequently cited bases on which the 

Trustee alleged bad faith, according to our analysis of available cases.

Table 5: Most Prevalent Bases on Which the Madoff Trustee Has Alleged Customers 

or Others Acted in Bad Faith 

Basis for allegation defendant(s) knew or should have 

known of the fraud

Number (percentage)

of bad faith cases

(N=29)

Defendant enjoyed unique access to Madoff firm, or had close 

personal relationship with Madoff.

29

(100%)

Defendant received funds or financial benefits from Madoff firm 

in manner that was clearly fraudulent or suspicious in nature. 

24

(83%)

Defendant was Madoff employee or other associate who actively 

conducted or concealed fraud, or was Madoff officer who 

breached fiduciary duty of due diligence. 

21

(72%)

Madoff accounts held by defendant experienced unusual 

purported transactions such as backdating or reversing or 

canceling of trades; or included guaranteed rates of return. 

19

(66%)

Defendant was either reasonably prudent or sophisticated 

investor, based on education or work experience. 

16

(55%)

Source: GAO analysis of bad faith complaints filed by Madoff Trustee.

Notes: A single bad faith case may cite multiple bases for acting in bad faith. Percentage figures 

based on 29 complaints publicly available, and excluding 1 complaint filed under seal. 

The Trustee told us that initially, he believed that anyone working in 

Madoff’s investment advisory unit would be a bad faith participant. 

However, through additional investigation, including document 

examination, taking of depositions, and reconstruction of computer 

records, the Trustee said he determined not all such employees may 

have been aware of the fraud. For example, the Trustee initially believed 

Madoff’s secretary was involved in the fraud, given her position close to 
 

Page 29 GAO-12-991 Securities Investor Protection Corporation

Madoff, but later determined she did not have knowledge of the fraudulent 

activities.34

In several cases, the Trustee is alleging bad faith against Madoff relatives 

who worked at the firm, or other, nonemployee relatives who received 

funds. For example, the Trustee sued Madoff’s wife to recover funds 

transferred from the firm that were used to buy a yacht for approximately 

$2.8 million, to pay off a $1.1 million credit card balance, or to fund other 

investments. The Trustee sued the wife of Madoff’s brother, who worked 

at the firm, for receiving $1.5 million in purported salary from 1996 to 

2008, after the Trustee’s investigation concluded she never performed 

any work for the position. Among defendants who were not employees or 

relatives are individuals who allegedly identified and recruited investors 

for the Madoff firm. For example, the Trustee alleges an accounting firm 

pooled hundreds of millions of dollars for investment while keeping tens of 

millions of dollars itself.

Although many Madoff customers typically experienced outsized returns 

based on market developments, some bad faith defendants received 

exceptionally high returns, the Trustee alleges. In one case, for example, 

the Trustee cites returns as high as 175 percent. Moreover, in some 

cases, the bad faith defendants include large investors for whom the 

trustee alleges their financial or business sophistication provided them 

with the ability to realize that they were benefiting from a fraud. For

example, the Trustee alleges one set of defendants is a closely held 

family business that was also an investor in another investment fraud that 

was so similar to the Madoff firm it should have been clear Madoff was 

also running a fraud. In his complaint, the Trustee quotes an employee of 

the business as saying shortly after Madoff’s arrest, “Our CIO [chief 

information officer] always said it was a scam, ‘too good to be true’[.]” 

Another bad faith defendant, according to the Trustee, had been closely 

associated with Madoff professionally and socially for decades, investing 

in the firm through more than 60 entity and personal accounts. According 

to the Trustee, some of the accounts reported consistently high annual 

returns between 20 percent and 24 percent, with only 3 months of 

negative returns over 12 years. Other accounts of the defendant 

sometimes experienced returns greater than 100 percent or even 300 

 

34Bankruptcy Rule 2004 provides the ability to develop information through examinations, 

depositions, and other methods, the Trustee told us. He said he used this ability to 

develop information leading to good faith/bad faith determinations.
 

Page 30 GAO-12-991 Securities Investor Protection Corporation

percent, he alleges. According to the Trustee, the defendant acted as an 

investment advisor, and thus should have known such returns were not 

likely possible without fraud.

As shown in table 6, the 10 largest bad faith complaints, measured by 

amount sought, have sought a total of $10.7 billion, or more than 97 

percent of the $11.0 billion the Trustee is seeking in all 30 bad faith 

litigations. As of April 2012, the Trustee had obtained settlements, or a 

partial settlement, in four of these cases.

Table 6: Ten Largest Bad Faith Complaints by Madoff Trustee, by Amount Sought

Bad faith complaint Type/description Amount sought

Amount sought as 

percentage of total 

bad faith actions

Picower Individual with long ties to Madoff. $6,746,066,538 61.3%

Chais Individual with long ties to Madoff; oversaw funds 

invested with Madoff firm.

$1,152,597,632 10.5%

Katz Sophisticated investors with long ties to Madoff. $1,018,098,199 9.3%

Avellino & Bienes Individuals and entities that helped perpetuate and 

sustain the fraud.

$904,515,689 8.2%

Peter B. Madoff Madoff family members, sophisticated financial 

professionals, and Madoff firm corporate officers.

$226,374,622 2.1%

Cohmad Securities Inc. Individuals and entities that helped perpetuate and 

sustain the fraud.

$213,080,310 1.9%

Magnify Inc. Individuals and entities that were sophisticated 

investors with unique access to Madoff that channeled 

money to international entities.

$154,403,464 1.4%

Glantz Individuals who were sophisticated investors and had 

long ties to Madoff. 

$113,385,537 1.0%

Blumenfeld Individual with close ties to Madoff. $100,033,990 0.9%

American Securities 

Management LP

Sophisticated investors and entities with close ties to 

Madoff. 

$91,896,296 0.8%

Total $10,720,452,277 97.4%

Source: GAO analysis of Madoff Trustee data and bad faith complaints filed by the Trustee.
 

Page 31 GAO-12-991 Securities Investor Protection Corporation

As noted, feeder funds are investment vehicles that collected funds from 

investors and then channeled the money to the Madoff firm. The Trustee 

has filed 27 bad faith actions against feeder fund defendants, seeking 

nearly $100 billion. The amounts sought range from a low of $10.4 million 

to a high of $58.5 billion. The average amount sought is $3.7 billion, with 

a median of $182.4 million. The amounts the Trustee is seeking include 

fictitious profits, principal amounts invested, fees, interest, and in some 

cases, punitive damages. Typically, the Madoff feeder funds raised 

money from high-net-worth individuals in operations that spanned the 

globe. In addition to the feeder funds themselves, banks and other 

financial institutions are among the defendants in these cases. For 

example, some were custodians of the feeder funds, some were 

administrative agents, and some were involved in marketing the funds to 

prospective investors. Some banks and financial institutions had more 

than one role in their involvement with feeder funds.

According to the Trustee, feeder funds account for about $14.2 billion of 

the approximately $19.6 billion in total principal lost by all customers. In 

suing for bad faith, the Trustee has alleged these defendants either knew 

or should have known of the Madoff fraud. In some of the feeder fund 

cases, the Trustee is also alleging participation in, and concealment of, 

the fraud. With the bad faith allegations, as with bad faith cases filed 

against individuals, the Trustee can sue to recover funds beyond principal 

withdrawn in the preference period and fictitious profits withdrawn in the 

6-year period. In addition, he can use common law grounds to seek 

additional damages based on alleged harm caused by parties aiding the 

fraud. As a result, the total he is seeking in the six largest feeder fund 

actions is $94 billion, which greatly exceeds the amount of principal these 

entities invested into the scheme. Table 7 summarizes these cases, 

which represent nearly 95 percent of the total amount sought in feeder 

fund cases.

Trustee Seeking Nearly 

$100 Billion in Cases 

Involving Entities That 

Channeled Investor Funds 

to the Madoff Firm
 

Page 32 GAO-12-991 Securities Investor Protection Corporation

Table 7: Key Allegations in Six Largest Feeder Fund Complaints by Madoff Trustee, by Amount Sought

(Dollars in billions)

Case

Total 

sought Key Trustee allegations Status 

Kohn $58.5 • Defendant, who operated as Madoff insider, knew Madoff was a fraud but 

fed more than $9.1 billion to the firm over more than 20 years, often from 

wealthy Europeans.

• Madoff secretly paid Kohn at least $62 million for steering funds to his firm.

Some defendants 

dismissed and 

case not closed

JP Morgan 

Chase

$19 • Madoff firm’s primary banker for more than 20 years. Its due diligence

revealed the fraud, but the bank continued business as usual.

• Defendant received at least $500 million in fees and profits from Madoff 

business and also selling structured financial products tied to Madoff feeder 

funds. 

In litigation

HSBC $9 • Enabled the fraud by encouraging more than $8.9 billion in investments in 

an international network of feeder funds through its role as marketer, 

custodian, and administrator of the funds.

• Defendants ignored numerous indicators of fraud and surrendered all 

custodial duties to the Madoff firm without any disclosure to investors.

• Aided and abetted the fraud in order to reap more than $400 million in fees.

In litigation/on 

appeal

Fairfield 

Sentry Limited

$3.5 • Madoff firm’s largest feeder fund operator, with nearly $14 billion invested in 

2008. It failed to perform due diligence after signs of fraud and misled 

regulators and investors.

• Defendants had actual knowledge of the fraud and received more than $1 

billion in fees. 

Some defendants 

settled but not 

dismissed/on 

appeal

Tremont 

Group 

Holdings

$2.1 • Madoff firm’s second largest feeder fund operator channeled more than $4 

billion into the fraud.

• Defendants failed to perform due diligence after signs of fraud, despite 

repeated warnings and opportunities.

• Defendants received more than $240 million in fees over 15 years. 

Some defendants 

settled but not 

dismissed/on 

appeal

UBS $2 • UBS partnered with Access International Advisors to enable the fraud 

through international feeder funds.

• UBS served as custodian and administrator for the feeder funds, only to 

surrender all custodial duties to the Madoff firm without disclosure to 

investors; also relied upon the firm to verify existence of trades.

• Based on its own due diligence, UBS knew the Madoff firm was likely a 

fraud, but continued to do business as usual and earned at least $80 million 

in fees. 

In litigation

Total $94.1

Source: GAO review of individual case filings.

The Trustee told us that compared to other litigation he is pursuing, 

feeder fund actions require different types of evidence, due to the nature 

of their operations. For example, feeder fund managers benefited through 

investment and management fees charged by the funds, which were 

subsequently paid to individuals as salaries and bonuses. The Trustee 
 

Page 33 GAO-12-991 Securities Investor Protection Corporation

considers these payments to be fraudulent. In the Tremont case, for 

instance, the firm managed five funds that invested directly with the 

Madoff firm, as well as more than a dozen other funds that were indirect 

Madoff investors, via investments in the directly invested funds. The 

Trustee alleged that in the 6 years before the Madoff firm failed, Tremont 

defendants received more than $180 million in management, 

administration, and other fees; bonuses; profits; compensation; dividends; 

and partnership distributions. Additionally, a number of the feeder fund 

defendants were net losers. In such cases, the Trustee also sought to 

defer SIPA claims they filed pending resolution of the Trustee’s actions 

against them. In general, given the complexities of feeder fund 

relationships, the Trustee determined amounts sought by looking at 

principal, not fictitious profits, he told us.35

As shown in table 7, the Trustee has alleged that banks, financial 

services entities, and related individuals facilitated the Madoff fraud. For 

example, HSBC served as marketer, custodian, and administrator for 

numerous feeder funds. The Trustee alleged that HSBC surrendered all 

custodial duties to the Madoff firm, while continuing to collect fees, and 

without any disclosure to investors. The Trustee stated that this surrender 

removed a system of checks and balances and allowed the Madoff firm to 

assert the existence of assets and trades that never existed. As for 

marketing feeder funds, the Trustee maintains that HSBC acquiesced to 

Madoff’s demands to keep his name out of offering documents, despite 

the bank’s own concerns about its inability to conduct proper due 

diligence on Greenwich Sentry, a Madoff feeder fund. Feeder funds also 

worked with banks to create derivative products based on feeder fund 

returns, according to the Trustee. For example, investors in these 

“leveraged notes” would be entitled to receive returns based on a feeder 

fund’s returns, while a financial institution, usually a bank, would receive 

fees for structuring the notes and interest for lending funds used as part 

of the investment. Concurrently, the bank would purchase shares in the 

feeder fund in order to hedge its exposure in the leveraged notes. The 

end result, according to the Trustee, was that hundreds of millions of 

additional dollars were invested into the Madoff operation.

 

35Many feeder funds themselves are in liquidation, with their own trustees, the Trustee 

told us. Feeder fund customers can bring a claim within their own liquidations, he said.
 

Page 34 GAO-12-991 Securities Investor Protection Corporation

In bringing the feeder fund actions, the Trustee has made a number of 

specific allegations to support bad faith and complaints of illicit funds 

received. While particular allegations vary across cases, we found the six 

cases we examined shared three major elements. First, defendants are 

alleged to have profited from the fraud primarily through fees received.

For example, UBS is alleged to have received fees for purportedly serving 

in custodial and asset management functions for the feeder funds, 

Luxalpha and Groupement Financier. UBS sponsored the formation of 

Luxalpha and served as prime banker for Groupement Financier. The 

Trustee considers the fees UBS derived to be customer property that 

should be recovered. Second, the Trustee alleges defendants breached 

their duty of due diligence to their customers. For example, the Trustee 

alleged that Fairfield Greenwich Group, Madoff’s largest feeder fund 

group, did not “properly, independently, and reasonably perform due 

diligence into the many red flags strongly indicating Madoff was a fraud.” 

Third, the defendants are alleged to have either aided and abetted or 

actively participated in the fraud. In the JP Morgan Chase case, the 

Trustee alleged that through its interactions in different capacities—as 

banker, lender, and investor—with the Madoff firm over 20 years, the 

bank was uniquely positioned to see the fraud and put a stop to it.

Instead, the trustee alleges that this institution continued to conduct 

business as usual, which allowed the firm to profit and the fraud to 

continue unabated.

As with other actions, the Trustee has sought feeder fund recoveries 

based on the 90-day preference period and the 2- and 6-year periods, 

relying on both the federal bankruptcy statute and New York state law. In 

instances where the defendant was considered an insider, the Trustee 

sought to extend the preference period to 1 year. The Trustee has also 

sought to recover transfers to subsequent transferees. In a number of 

cases, for example, the Trustee has pursued this course against 

individuals paid a salary or a bonus by the banks or feeder funds 

involved.

In hundreds of cases, the Madoff Trustee has reached settlements with 

former customers and others, either before or after filing clawback 

actions, and these agreements have produced recovery of a significant 

amount of assets. As of April 2012, the Trustee had entered into 441 

settlement agreements in which the opposing parties agreed to return 

about $8.4 billion—an amount equal to about 49 percent of the 

approximately $17.3 billion in principal investments lost by customers who 

filed claims. According to our review, the settlement amounts range from 

Trustee Settlements to 

Date Have Recovered 

Nearly Half of Customer 

Investment Losses
 

Page 35 GAO-12-991 Securities Investor Protection Corporation

a low of $36 to a high of $5 billion, with an average of $19 million and a 

median of $66,000. Through July 2012, the Trustee had collected 85 

percent of total settlement amounts, or about $7.1 billion. Many 

settlement terms are complex. For example, settlements with feeder 

funds that were net losers require these entities to return certain funds 

they received before the Trustee will consider accepting their loss claims.

The Trustee groups settlements into three major categories:

• Prelitigation: Settlements reached before the Trustee filed a 

clawback action.

• Litigation: Settlements reached in cases where the Trustee had 

already filed a clawback action.

• Customer avoidances: Recoveries based on the 90-day preference 

period, but where no clawback action was filed.

A fourth category, “Funds not yet received,” is a temporary accounting of 

amounts that will be allocated to the three main categories upon receipt of 

the first settlement payment. Table 8 shows a summary of the Trustee’s 

settlement agreements by category as of July 2012. As the table shows, 

for example, the customer avoidance category represents 85 percent of 

all settlement agreements reached, although these cases have the 

smallest total dollar value among the categories. Although, as the table 

shows, the settlements total $8.4 billion, the Trustee through July 2012

had yet to receive $1.2 billion in settlement funds, due to pending appeals 

and specific provisions in settlement agreements.

Table 8: Settlement Agreements Reached by Madoff Trustee, by Category, as of July 2012

Number

Percentage of 

settlements

Total settlement 

amount Amount collected

Percentage 

collected

Customer avoidances 375 85% $117,173,238 $114,642,776 97.8%

Litigation settlements 44 10 $5,185,109,046 $5,099,292,433 98.3

Prelitigation settlements 13 3 $1,892,758,633 $1,892,758,598 100

Funds not yet receiveda 9 2 $1,199,150,000 N/A N/A

Total 441 100 $8,394,190,917 $7,106,693,807 84.7%

Source: GAO analysis of Madoff Trustee data.

a

Includes settlements of all types for which funds have yet to be received. Amounts from settlements 

under appeal and settlements with provisions for future payments fall into this category. 
 

Page 36 GAO-12-991 Securities Investor Protection Corporation

The Trustee told us he and his counsel consider a number of factors 

when deciding to enter into a settlement agreement. There are no formal 

criteria, he said, but factors such as location of the defendants, litigation 

risk, and timing of the clawback can influence the settlement decision. 

Two of the most important factors, the Trustee told us, are the 

defendant’s ability to pay and whether the settlement will produce 

proceeds that enhance the customer fund he is building during the 

liquidation. The bankruptcy court must approve settlement agreements 

worth $20 million or more. In addition to whether a settlement is in the 

best interest of the estate, the court also considers whether a proposed 

settlement is fair and equitable, and above “the lowest point in the range 

of reasonableness,” the Trustee told us. In deciding whether a particular 

agreement falls within that range, the court considers:

• probability of success in litigation; 

• difficulties of collection; 

• litigation complexity, and expense, inconvenience, and potential for 

delay; and 

• creditor interests.

On the key issue of ability to pay, the Trustee said his approach is that he 

would rather agree to a settlement for less money and be able to collect 

it, than win a judgment for a greater sum that he is ultimately unable to 

collect. He cited the Katz-Wilpon settlement as an example.36 Originally, 

the Trustee sued for more than $1 billion, but reached a settlement in 

April 2012 for $162 million, based on his conclusion of what the 

defendants could pay. In other areas, the Trustee also told us he is 

sensitive about clawing back funds from charitable institutions, saying that 

although they have received other investors’ funds, he did not want to put 

them in the position of raising money in order to pay a settlement. We 

examined all but one settlement agreement among those worth at least 

$20 million.37

 

36Saul Katz and Fred Wilpon are co-owners of the New York Mets Major League Baseball 

franchise. Katz, Wilpon, members of their families, and business associates were named 

as defendants in the Trustee’s clawback action. 

Appendix IV provides details of these settlements, including 

37The excluded case was sealed for confidentiality, with the Trustee having filed no 

clawback action. Thus, details were unavailable.
 

Page 37 GAO-12-991 Securities Investor Protection Corporation

amounts sought and obtained, the extent to which settlements have been 

paid, strategies behind settlements, and key provisions.

A number of factors motivate counterparties to settle with him, the 

Trustee told us. One is that defendants have fiduciary duties to clients or 

customers, and amounts at issue in a case might be so significant that, 

for example, feeder fund managers might conclude their duty is to settle 

in order to recover assets for customers. Some parties, to protect client 

confidentiality, may settle in order to prevent disclosure of client 

information that could become public in litigation. Other parties might 

seek closure. Overall, the Trustee told us he thinks he has built a solid 

record in his settlements. The market itself has validated his efforts, he 

said, which can be seen in increases in the price of Madoff claims being 

traded following announcement of recent settlement agreements.38

As part of our review of records provided by the Trustee, we noted some 

customer accounts having a negative balance. For example, in the 

Picower case, the records showed a negative balance of $6.3 billion. In 

theory, this reflected some kind of margin account or debit account, the 

Trustee told us, even though such an amount would not have been in 

keeping with standard industry practices. Such negative balances raised 

questions whether the reported amounts represented debt owed by 

customers to the Madoff firm, and if so, whether the presence of such 

debt diminished the value of settlements obtained from such customers. 

To obtain the $7.2 billion Picower settlement, for example, the Trustee 

told us that he agreed to characterize the amount being returned as a 

loan repayment. However, both the Trustee and SIPC executives told us 

that the use of this terminology, or presence of negative balances, does 

not change the effect of underlying actions, which was to extract fictitious 

profits from the Madoff firm. In particular, the Trustee told us, he 

determined claims for all accounts based on the money invested less 

money withdrawn method. Purported indebtedness or negative balances 

did not affect those calculations, he said, and had no effect on settlement 

efforts.

 

38After the Trustee made determinations on customer claims for reimbursement, a market 

emerged for trading of approved claims in which the right to receive the distribution of 

customer property from the Madoff liquidation can be sold by the claimant to other parties. 
 

Page 38 GAO-12-991 Securities Investor Protection Corporation

The Trustee created a hardship program in which he considered the 

degree of financial distress of Madoff customers in processing claims and 

deciding whether to pursue clawback litigation. He told us that the 

program was to recognize harm the Madoff fraud caused to former 

customers. No other SIPC liquidation has had such an option, the Trustee 

told us. This program, which was not open to institutional customers, had 

two elements for individuals who could demonstrate financial hardship:

• Claims. The Trustee provided expedited consideration of claim 

applications. This did not provide applicants with any more favorable 

treatment, as claims were still determined on the NIM basis. But it 

accelerated consideration of claim applications, which, if approved, 

could result in customers receiving any SIPC advances due them 

more quickly. According to the Trustee, if complete account 

information was available, a determination on qualification for 

expedited claim review was made in about 20 to 30 days, with another 

20 to 30 days to determine the actual claim. This compares to a 

typical claim taking 3 months or more.

• Clawbacks. The Trustee would not sue for clawbacks, or would drop 

suits already filed.39

The Trustee told us he invited applications to the hardship program, but 

also included some claimants in the program on his own initiative. Figure 

7 shows a breakdown of the Trustee’s consideration of hardship cases.

 

39As noted, the hardship program was open to individuals, but the Trustee told us that in 

some clawback cases, a family trust might have been named in an action. In such 

instances, if all matters tied back to individuals, the cases could nevertheless be 

considered under the clawback option of the hardship program.

Under a Hardship 

Program, the Trustee 

Expedited Claims and 

Avoided Lawsuits for 

Individuals in Financial 

Distress
 

Page 39 GAO-12-991 Securities Investor Protection Corporation

Figure 7: Madoff Trustee Hardship Program Process and Outcomes, as of May 2012

Note: Percentages are rounded. 

According to the Trustee, he assessed general factors in considering 

hardship applications, but there were no formal criteria or decision rules. 

Instead, the Trustee told us, he applied his judgment after applications 

were reviewed at the Trustee’s counsel law firm. The general factors, 

applicable to both the claims and clawback elements of the program, 

included whether, due to lost investments or the possibility that funds 

withdrawn must be returned, the customer:

• needed to return to work,

• had declared bankruptcy,

• was unable to pay for living expenses,

• was unable to pay for dependents, or

• suffered from health problems.
 

Page 40 GAO-12-991 Securities Investor Protection Corporation

Additionally, the Trustee said he took into account whether former 

customers used any fictitious profits to pay taxes. If so, the Trustee told 

us he considered such payments in his decisions.

The process for considering hardship applications was similar for both the 

claims and clawback elements, the Trustee told us. For claims, an 

attorney reviewed an application and made a recommendation to the 

Trustee, who then decided the matter. For clawbacks, the Trustee’s 

counsel team responsible for the litigation reviewed the application, and, if 

necessary, would seek additional information. The team would make a 

recommendation to a review committee, comprised of five lawyers, for its 

evaluation. The committee would make a recommendation to the Trustee, 

who then decided the matter.

According to information we reviewed, hardship program applicants were 

predominantly older, and the most commonly cited reasons for financial 

distress, for either element, were the inability to pay living expenses and 

health problems. The Trustee said most cases were not difficult to decide, 

based on the evidence presented. He told us that while he and others 

reviewed applications carefully, requesting additional information when 

necessary, they attempted to not be overly intrusive into private affairs. 

We reviewed a number of applications provided by the Trustee, 

illustrating acceptance or rejection of customers’ hardship applications. 

Table 9 summarizes some of the cases we reviewed.

Table 9: Examples of Customer Circumstances among Hardship Applications Accepted and Denied

Hardship program 

option Application approved Application denied

Claims Former customer said he suffered catastrophic injury, 

requiring multiple surgeries, forcing him out of work and 

jeopardizing financial stability. “I am scared of 

becoming homeless overnight. Please do not allow me 

to become...a virtual ward of the state.” 

Couple with primary residence and two vacation 

properties said they were forced to borrow to meet 

annual expenses of $450,000 plus living costs, and that 

SIPC payment would allow them to hold on until real 

estate market hopefully improved.

Clawbacks Older woman said she lost husband, and his disability 

payments; had only Social Security income; and turned 

to food stamps, Medicaid, and grants from local charity. 

Approving hardship request “might allow me to sleep at 

night without the fear of being homeless.” 

Older man with annual income of about $350,000, 

assets of about $7.5 million, and no liabilities said 

higher expected costs for medicine and care would 

force use of savings. “I would greatly appreciate your 

revoking the lawsuit that you have started against me.” 

Source: GAO review of Madoff Trustee information.
 

Page 41 GAO-12-991 Securities Investor Protection Corporation

As noted, the claims hardship part of the program did not alter outcomes, 

as it provided only expedited review. For the clawback portion, results 

varied by type of action, according to information the Trustee supplied in 

response to our queries. Figure 8 summarizes results.

Figure 8: Results of the Clawback Element of the Madoff Trustee’s Hardship 

Program, as of June 2012

Within weeks of the Madoff firm’s failure, SEC officials were studying 

whether clawback actions were permissible, and concluded they were. 

SEC officials told us the issue was a difficult one, because innocent 

investors would become the target of lawsuits; at the same time, if the 

Trustee did not pursue the recovery actions, others would be hurt. From 

the beginning of the case, SEC thought that clawbacks would produce the 

bulk of assets available for distribution to customers, because billions of 

dollars had been withdrawn from the firm shortly before its failure.

SEC officials told us they have had discussions with the Trustee (and 

SIPC) on his clawback litigation, on such issues as legal theories being 

employed, risks presented, legal costs, and expected future 

developments. But they have not had day-to-day involvement in the 

litigation, nor been involved in developing the legal strategies employed, 

the officials told us. SEC officials told us an examination will come later, 

but based on their experience, the Trustee appears to be conducting the 

litigation in an acceptable manner and has applied the law properly and 

SEC and SIPC Involved in 

Trustee’s Litigation and 

Consider It Successful 

Thus Far
 

Page 42 GAO-12-991 Securities Investor Protection Corporation

fairly. They said they were not aware of any particular problems or issues 

with the litigation, although courts have not always adopted the Trustee’s 

positions. SEC officials told us they were not concerned about runaway or 

needless litigation, and the main outcome of the litigation is that the 

Trustee has recovered large sums that are considerably more than 

initially expected.40

SIPC executives likewise told us they always thought clawbacks would be 

a critical part of recovering assets for customers. SIPC did not have any 

discussions with the Trustee about clawbacks prior to his appointment, 

they said, other than to discuss whether there were adequate resources 

available at his law firm to bring the expected cases. The officials 

characterized their involvement with the Trustee as providing institutional 

knowledge and high-level advice and strategy, albeit with the 

understanding that the independent Trustee need not accept it. SIPC’s 

most significant contribution is payment of litigation expenses, SIPC 

executives told us, because otherwise, the Trustee could not finance his 

litigation. The SIPC executives told us they consider the Trustee’s 

litigation a success, but that his efforts are thus far incomplete, as many 

cases remain outstanding. Although total settlement amounts to date 

reflect mostly one case ($5 billion for Picower), other settlements still 

have produced significant sums. The cases the Trustee is pursuing are 

complex, involving difficult and time-consuming legal work to resolve, the 

executives said. Costs of the litigation are favorable when compared to 

what attorneys would collect in contingent lawsuits, they said.

 

40SEC officials also told us that before the Trustee created the hardship program, there 

was significant agency concern about clawbacks, and whether the Trustee would file 

actions against small net winners. The specific concerns were high cost of pursuing such 

cases, and the relatively small amounts of money involved, the officials told us. They said 

they expressed these concerns to the Trustee, who thereafter created the program, which 

satisfactorily addressed SEC’s concerns.
 

Page 43 GAO-12-991 Securities Investor Protection Corporation

Because the Madoff fraud affects customers’ taxable income, it also 

affects federal tax collections by the U.S. Treasury. Madoff customers can 

seek tax relief for fraud-related losses in several ways, including one 

special procedure announced by IRS in the wake of the firm’s failure.

However, IRS officials were unable to quantify the overall impact of the 

fraud on tax collections, and the impact may be reduced by various 

factors that could limit taxpayers’ ability to take full advantage of the tax 

relief available. In addition, while the use of either NIM or FSM to 

determine customer net equity could lead to different outcomes for 

account holders, either method likely reduces tax revenues. Tax experts 

expressed concerns about the lack of clarity over how payments 

stemming from fraud-related avoidance actions, or clawbacks, filed by the 

Trustee will be treated for tax purposes. After we identified concerns to 

IRS that lack of guidance could lead to taxpayer errors resulting in overor underpayment of taxes, the agency issued such guidance. 

The Madoff fraud affected the federal income tax liabilities of former 

customers in two primary ways, according to our review.41 First, 

customers likely paid federal income taxes on fictitious profits reported to 

them in each year they held their account.42

Typically, there are two ways to address these effects upon discovery of 

such fraud, according to IRS officials.

Second, they likely suffered 

theft of funds invested, which under tax law would be considered an 

investment theft loss.

43

 

41We confine our discussion here to federal income taxes. Additional tax effects are to be 

expected to the extent state- or local-level income tax filings rely on or otherwise make 

use of federal income tax calculations.

Taxpayers can file amended 

returns, in which they remove fictitious profits from previously reported 

income. In addition, they can claim a theft loss deduction against income, 

42Ordinarily, according to IRS officials, investors must pay taxes on dividends and interest, 

as well as on capital gains from sales or liquidations. They do not pay taxes on unrealized 

capital gains. However, customer statements from the Madoff firm indicated it was 

regularly liquidating customer positions; thus, capital gains and losses were reported to 

investors as realized gains or losses. SIPC executives told us positions were reported sold 

monthly, as Madoff purported to move customer holdings into cash.

43We underscore these are general descriptions only. According to IRS officials and tax 

practitioners, individual cases can vary significantly, depending on specific taxpayer 

circumstances.

Effects of the Fraud 

on Income Tax 

Revenues Cannot Be 

Determined, and New 

Guidance on 

Clawbacks Could 

Reduce Taxpayer 

Errors 

Madoff Customers Can 

Seek Tax Relief Several 

Ways
 

Page 44 GAO-12-991 Securities Investor Protection Corporation

to reflect principal amounts stolen and fictitious profits reflected on 

account statements that were not removed on any amended returns.44

Under the Internal Revenue Code, an investment theft occurs when a 

taxpayer loses property to theft in connection with a transaction entered 

into for profit. Taxpayers can use amended returns or claim theft loss 

deductions, singly or in tandem, depending on their situation, according to 

IRS officials.45

In addition to these typical remedies, IRS has also provided another 

option, referred to as a “safe harbor” approach. This allows taxpayers to 

deduct a percentage of lost principal including all previously reported 

profits in a single year—the year of a criminal charge against the 

perpetrator, or 2008 for the Madoff case.

But each of these approaches has limitations, according to 

the officials. For instance, taxpayers can generally file an amended return 

to claim a refund of taxes paid within 3 years of the original filing date, or 

2 years from the date the tax was paid, whichever is later. In the case of 

the theft loss deduction, taxpayers cannot take the deduction to the extent 

they have been reimbursed for the loss, and if they have a claim for 

reimbursement, they cannot deduct their loss until the amount of recovery 

to be received can be “ascertained with reasonable certainty.” In the 

Madoff case, the Trustee is working to recover assets to benefit former 

customers, but how much he will ultimately recover, and by when, 

remains unknown.

46

 

44According to IRS, an investment theft loss deduction is allowed only to the extent an 

investor has not received any reimbursement for the loss.

According to IRS, the purpose 

of the safe harbor is to ease the compliance burden for both the agency 

and taxpayers, avoiding what can be complicated questions on size and 

timing of a theft loss deduction. Under the safe harbor approach, 

taxpayers can deduct 95 percent of their losses in the year of discovery 

45Generally, according to IRS officials, the ability to amend prior returns or to take a theft 

loss deduction does not vary by taxpayer type, such as individual or corporation. However, 

when an individual invests in a Ponzi scheme through another entity, such as a 

partnership, the rules can be different. An individual who invests in a Ponzi scheme by 

means of a “flow-through” entity, like a partnership or a limited liability company treated as 

a partnership for tax purposes, can amend returns or take a theft loss deduction, based on 

the proportionate share of income or deductions that flow through to partners or members 

of the entity. By contrast, an individual investing through a C-corporation would not be 

able to take a theft loss deduction, as that option would lie with the corporation itself. In 

general, IRS officials said, the tax code treats the partnership as an entity, but doesn’t tax 

at the entity level; instead, only participants are taxed.

46See Internal Revenue Service, Rev. Proc. 2009-20.
 

Page 45 GAO-12-991 Securities Investor Protection Corporation

(when the lead figure is criminally charged). The loss is calculated by 

adding principal invested plus profits (whether fictitious or real), less cash 

withdrawals and recoveries from SIPC or other sources. For taxpayers 

seeking recovery from third parties, such as through lawsuits, the figure is 

reduced to 75 percent. If the taxpayer follows the safe harbor 

requirements, IRS agrees not to challenge the taxpayer’s treatment of a 

qualified loss as a theft loss, and taxpayers waive their right to other 

remedies that might have been available.47 The safe harbor approach 

deems the reasonable prospect of recovery condition of the standard theft 

loss deduction to be satisfied in the year of discovery. Thus, Madoff 

customers electing to use the safe harbor approach may be able to 

recognize their losses earlier than under the normal method for deducting 

a theft loss.48 However, if customers using the safe harbor approach later 

receive distributions of recovered assets from the Trustee that cause their 

claimed deduction to exceed their actual losses, they must report the 

excess amounts as income in the year received.49

IRS officials told us they could not say which method of claiming tax relief 

is best for taxpayers, because individual tax situations can vary widely.50

 

47Generally, an investor that had actual knowledge of the fraud before it became public 

would not be eligible to use the safe harbor, according to IRS officials. However, they 

could still amend returns to remove fictitious income or take a theft loss deduction, as 

applicable. This is because the tax code requires only that money was lost and that it was 

stolen from the investor. Even if an investor had knowledge of the fraud, as long as they 

were victims of theft, they are still eligible for amended returns or the theft loss deduction, 

according to the officials. However, depending on the investor’s actual involvement with 

the fraud, IRS could deny the theft loss deduction or not allow removal of fictitious income, 

according to the officials.

Tax practitioners to whom we spoke said the safe harbor is attractive for 

its certainty and ease of use, but some taxpayers may be better off using 

the traditional methods. However, one practitioner told us that anyone 

who can use the safe harbor should do so.

48In addition, deductions under the safe harbor approach take into account all previously 

taxed income from a scheme, whether it was fictitious or real, which is more similar to the 

FSM method than the NIM method.

49Likewise, customers using the safe harbor approach may have an additional deduction 

of the remaining 5 percent or 25 percent of the loss, depending on the amount of 

recovered assets from the Trustee or from other claims. 

50They also noted that confidentiality provisions generally bar IRS from releasing 

taxpayer-specific tax return information. See Internal Revenue Code, sec. 6103, 

“Confidentiality and disclosure of returns and return information.” 
 

Page 46 GAO-12-991 Securities Investor Protection Corporation

According to IRS officials, the agency cannot determine the tax revenue 

loss to the U.S. Treasury that will result from Madoff customers seeking 

relief for their fraud-related losses. IRS cannot identify Madoff taxpayers, 

and even if it could, it does not collect necessary information to conduct a 

post-Madoff analysis of the fraud’s impact on tax revenues. IRS officials 

told us they generally do not maintain statistics on any particular Ponzi 

scheme or identified investment fraud. They also told us they cannot 

identify which Madoff customers are using which tax relief method, further 

complicating any effort to assess the impact of the fraud on tax revenues.

In any case, although IRS cannot determine the amount of any revenue 

loss, the Madoff fraud’s effect on tax collections could be reduced by 

various factors that can limit taxpayers’ ability to take full advantage of 

their losses. These factors generally affect the ability of taxpayers to claim 

an investment theft loss deduction, rather than limit the ability to file 

amended returns. According to IRS officials, SIPC executives, and tax 

practitioners, factors affecting the ability to make use of the theft loss 

deduction include:

• Deductions need income. The theft loss deduction is a deduction 

against income, not a tax credit. Therefore, to use the deduction, 

taxpayers must have income to apply it against. If they do not have 

sufficient income, they cannot use all or part of the deduction. This 

could be a common situation, because many Madoff customers are 

older and without income. If taxpayers have insufficient income to 

make use of the deduction in a particular year, IRS rules allow theft 

loss deductions to be carried over to other years—generally, 

backwards for 3 years, and forward for 20. But taxpayers must still 

have income, and even if they do, it could take a number of years to 

fully apply their deductions on that income, meaning that benefits 

could be delayed. One tax practitioner told us that even with extended 

carryback and carryforward periods, he would expect many people—

especially smaller investors—will not be able to use their deductions, 

for lack of income against which to apply it.

• “Leakage.” There can be considerable “leakage” when using the 

carryforward and carryback options for the theft loss deduction—that 

is, loss of other deductions when taking the theft loss deduction. 

Individuals claiming the theft loss deduction might also have other 

personal deductions, such as interest, taxes, or charitable 

contributions. With application of the theft loss carryback or 

carryforward amounts, income is reduced, with the result being that 

income against which to claim the personal deductions can be lost. 

The Fraud’s Impact on Tax 

Collections Cannot Be 

Determined, but It May Be 

Reduced by Limits on 

Taxpayers’ Ability to Fully 

Realize Tax Relief
 

Page 47 GAO-12-991 Securities Investor Protection Corporation

With insufficient income against which to claim the personal 

deductions, they are lost as well, offsetting benefits of the theft loss 

deduction. This is because the personal deductions are not 

themselves subject to carryback or carryforward. Generalizing about 

the effects of leakage is difficult because such calculations are 

taxpayer-specific, but the effect can be substantial, according to one 

tax practitioner.

• Rate differences. A taxpayer may have initially paid taxes on 

fictitious profits at a relatively high marginal rate, but later realize a 

theft loss deduction at a lower rate. This can mean the actual value of 

fraud-related tax relief received is less than initial amounts of tax paid. 

For example, someone may have paid taxes at a 35 percent rate, but 

be subject to a 15 percent rate when claiming deductions, because, 

for example, they lost investment income or retired and their income 

has fallen. As a result, their deduction reduces their income by a 

smaller amount than the amount of taxes that they paid in the past 

when their income tax bracket was higher.51 Such a rate difference 

could be significant if a taxpayer uses the IRS safe harbor approach.52

 

51In simplified numerical terms, a taxpayer who paid tax at the 35 percent rate on 

$100,000 in income would pay taxes of $35,000. But if the taxpayer later took a $100,000 

theft loss deduction, and their tax rate at the time was no longer 35 percent, but had fallen 

to 15 percent instead, the tax relief realized would be $15,000—$20,000 less than the 

amount of tax they initially paid. IRS officials told us that owing to individual 

circumstances, the reverse could also be true: A taxpayer could have paid a lower rate at 

the time of the fraud, and a higher rate later, making a deduction more valuable. 

A taxpayer may have received reported profits for a number of years, 

but be required, under the safe harbor approach, to deduct all losses 

in a single year. Such a large deduction in one year could reduce the 

taxpayer’s marginal tax rate from a high rate to a low rate. For 

example, a taxpayer may have paid taxes at the 35 percent rate, but 

by taking a deduction for all losses in a single year, find their tax rate 

averages out significantly lower. Further, the manner in which the 

Alternative Minimum Tax is calculated could also cause customers to 

52The discussion here and in the “Future tax liability” item following focus on the safe 

harbor approach, but we note the same considerations also apply to theft loss deductions 

generally.
 

Page 48 GAO-12-991 Securities Investor Protection Corporation

realize the benefit of their theft loss deductions at a rate lower than 

when they initially paid taxes.53

• Death. Should Madoff customers have died, estate and trust taxation 

issues could prevent full utilization of tax relief arising from the Madoff 

losses. For example, losses can offset estate income, but any losses 

remaining may not transfer with the property in subsequent tax 

considerations, according to one tax practitioner.

In addition, other factors also stand to affect tax collections, either 

providing additional revenues or increasing revenue loss, according to our 

review. These factors include:

• Future tax liability. Taxpayers using the safe harbor approach may 

owe additional taxes in the future. By allowing taxpayers to claim 95 

percent (or 75 percent) of their losses, the approach assumes a 5 

percent (or 25 percent) recovery of assets by the Trustee or in other 

recovery proceedings. According to IRS officials, if actual recoveries 

exceed those amounts, taxpayers must declare the excess as income 

and pay taxes on that income. Currently, the Trustee expects 

recoveries to be at least 50 percent, meaning losses taxpayers have 

claimed under the safe harbor could be overstated, triggering the 

future tax liability.54

• Other deductions. Investors can generally deduct expenses incurred 

in the production of income, IRS officials noted. That means that over 

the course of the Madoff fraud, customers would have been able to 

reduce taxable income based on any expenses the Madoff firm 

charged them.

• Madoff insiders. The Trustee told us that payments received by 

Madoff insiders raise tax issues. In some cases, Madoff made loans 

to immediate family, other relatives, and close associates. He often 

 

53The Alternative Minimum Tax (AMT) is a parallel tax calculation that attempts to ensure 

that those benefiting from certain tax advantages still pay a minimum amount of tax. The 

AMT provides an alternative set of rules for calculating taxes, and if a taxpayer’s tax as 

calculated in the normal manner falls below that amount, the taxpayer is required to make 

up the difference by paying the alternative minimum tax.

54IRS officials noted that the Trustee’s calculation of losses for claims purposes is different 

from losses calculated for tax purposes, and the difference in methods could affect 

whether additional taxes are triggered.
 

Page 49 GAO-12-991 Securities Investor Protection Corporation

forgave such loans later, but the forgiven amounts were not reported 

to IRS as income, the Trustee said. In other cases, some people 

received large cash payments from Madoff that were not reported as 

income. Additionally, according to the Trustee, some insiders 

periodically asked Madoff to produce gains or losses on their 

accounts, presumably in order to offset income from non-Madoff 

sources for tax purposes.

• Timing. Even if the government surrenders tax revenue as Madoff 

customers realize tax relief, the U.S. government collected and had 

use of tax receipts for multiple years. Meanwhile, as discussed earlier, 

taxpayers may have difficulty making full use of available benefits 

today. Given time value of money, and difficulty in capitalizing on 

benefits, this is advantageous to the government, tax practitioners and 

others told us.

While the use of NIM or FSM to determine net equity produce different 

outcomes for customers, both would likely reduce tax collections for the 

U.S. Treasury. Under NIM, net winners generally have their claims denied 

and are not eligible for reimbursement from the SIPC fund. Because SIPC 

payments reduce the amount that a taxpayer would claim as a loss, these 

customers would then likely have correspondingly larger theft loss 

deductions. In turn, those higher deductions could cause revenue losses 

for the Treasury that would not have been experienced if the Trustee had 

used FSM, which would have provided higher SIPC reimbursements.55

 

55Although SIPC, SEC, and the courts have supported the Trustee’s decision to use NIM, 

his selection of this method remains of interest and concern to some. Thus, we discuss 

the tax implications of both NIM and FSM for comparison purposes only.

This can be seen in SIPC estimates for coverage under the two methods. 

Under NIM, SIPC estimates an outlay of $889 million for payment of SIPC 

advances to Madoff customers. If FSM had been used to value claims, 

SIPC executives estimate that SIPC reimbursements would have 

increased by an additional $1.2 billion to about $2.1 billion. According to 

Either Claims Valuation 

Method Is Likely to 

Reduce Tax Collections
 

Page 50 GAO-12-991 Securities Investor Protection Corporation

IRS officials, an increase in SIPC coverage amounts—or any other 

coverage of losses—will correspondingly lower theft loss deductions.56

Ultimately, though, the choice of either claims determination method 

creates the potential for loss in tax revenues, because both NIM and FSM 

would create deductions against income by parties affected by the Madoff 

liquidation. While using FSM might have lowered theft loss deductions, 

owing to the greater SIPC reimbursements, it also would have caused 

greater demand on the SIPC fund, according to SIPC executives. As a 

result, SIPC’s broker-dealer members would have had to pay additional 

amounts to keep the fund at the level targeted by the SIPC board, the 

executives said. These greater amounts would have been either in the 

form of higher member annual assessments, or maintaining SIPC’s 

recently increased assessment for a longer period, they said. At this new 

assessment rate, SIPC members are currently paying about $400 million 

into the fund annually.

Under SIPA, the assessments are an ordinary business expense, SIPC 

executives told us. Thus, they are deductible as business expenses for 

tax purposes by member broker-dealers, which would have the effect of 

lowering members’ taxable income (or increasing losses). As a result, 

rather than the U.S. Treasury facing lower tax collections from Madoff 

customers due to use of NIM, it would experience lower revenues from 

broker-dealers under FSM. Although this tax trade-off effect is 

straightforward to describe, estimating how, if at all, tax revenues would 

change under one method compared to the other is not possible, due to 

taxpayer-specific reasons described earlier.

The Trustee told us that the effect on Madoff customers’ tax liabilities was 

not a consideration in his determination of how to calculate investor net 

equity.57

 

56However, once a customer’s SIPC payment, under either NIM or FSM, reaches the 

SIPC coverage limit of $500,000 per customer, additional losses no longer have this tax 

effect, according to IRS officials and the trustee’s counsel. That is, once the SIPC 

coverage limit is reached, taxpayers under either method would deduct similar amounts of 

losses, because there would be no additional SIPC payments to offset losses.

There is no statutory support for any such consideration, he said, 

57As discussed earlier, the Trustee did consider the tax issue with respect to hardship 

cases, whereby he took into account whether customers made withdrawals in order to pay 

income taxes. SIPC executives and SEC officials likewise told us tax liabilities were not a 

factor in their considerations. 
 

Page 51 GAO-12-991 Securities Investor Protection Corporation

and even if there was, considering tax implications would have created a 

substantial burden. To consider any tax implications, the Trustee said it 

would have been necessary to examine details of each account, which 

would have significantly increased the cost and amount of time to 

consider claims. Further, the Trustee told us he did not research or 

compile data on tax implications. However, he said he did provide 

information to IRS and the U.S. Department of Labor.58

As described earlier, a significant part of the Trustee’s efforts to recover 

assets for distribution to Madoff customers is his avoidance action, or 

clawback, litigation, in which he seeks to recover funds paid to certain 

customers. In general, if taxpayers, due to a clawback, return money 

previously paid to them, they are entitled to some reduction in tax liability 

as a result, IRS officials told us. However, application of relevant law, 

which deals with issues such as timing and nature of income, can be very 

taxpayer-specific, they said. IRS officials also told us initially that the 

agency did not have generally applicable guidance on the treatment of 

those payments. They said the agency had been seeking to formulate the 

right answer for dealing with clawbacks, but that it has otherwise provided 

only “factually specific guidance” on a case-by-case basis. In cases in 

which IRS has not issued such specific guidance, taxpayers must rely on 

the Internal Revenue Code, regulations, court cases, and relevant 

revenue rulings by the agency. Tax practitioners to whom we spoke noted 

uncertainties in determining how clawbacks should be treated for tax 

purposes, and that this makes completing income tax returns challenging 

and could contribute to errors.

IRS officials to whom we spoke said they had not issued guidance on this 

topic because their general approach was to initially focus on issuing 

guidance in areas with more widespread effect, such as the safe harbor 

procedures. A part of IRS’s mission is to help taxpayers understand and 

meet their tax responsibilities, and more than a thousand Madoff account 

holders and others face the possibility of having to return funds to the 

Trustee as a result of clawbacks. Future financial fraud cases could 

involve clawbacks in their resolutions as well. Without additional guidance 

 

58According to the Trustee, IRS was interested in the NIM calculation of net equity; the 

length of time customer accounts were open, perhaps to assess the impact of potential tax 

benefits; and information on types of customer accounts, such as individuals, 

corporations, or nonprofits. The Department of Labor received account information.

Tax Treatment of 

Avoidance Actions Could 

Affect Accuracy of Income 

Tax Filings
 

Page 52 GAO-12-991 Securities Investor Protection Corporation

to taxpayers for such situations, the potential for taxpayer error is 

increased, which could lead to either over- or underpayment of taxes to 

the U.S. Treasury. A recent audit by the Department of the Treasury 

Inspector General for Tax Administration illustrated tax compliance issues 

surrounding investment theft losses. After reviewing what it said was a 

statistically valid sample of 140 returns claiming investment theft loss 

deductions for 2008, the inspector general’s audit estimated that 82 

percent of 2,177 tax returns may have erroneously claimed deductions 

totaling more than $697 million and resulting in revenue losses of 

approximately $41 million. Three percent of the tax returns the inspector 

general sampled included taxpayers who claimed more than $215,000 in 

investment theft losses resulting from the Madoff scheme.59

Given the number of taxpayers that could be affected by clawbacks, in 

the Madoff case or others, the lack of guidance could affect the accuracy 

of many tax returns and potentially involve billions of dollars in returned 

funds. We identified this concern to IRS and recommended in a draft 

report that the Commissioner of Internal Revenue ensure that the agency 

provide taxpayer guidance on a timely basis on the proper tax treatment 

of funds returned through avoidance actions or settlements arising from 

cases of investment fraud. Subsequently, IRS on September 5, 2012, 

issued such guidance, in the form of “frequently asked questions” on how 

to treat clawbacks, which were posted to the agency’s website.

This audit did 

not specifically investigate treatment of clawbacks.

60

 

59See Treasury Inspector General for Tax Administration, Many Investment Theft Loss 

Deductions Appear to be Erroneous, 2011-40-124, September 27, 2011.

60Given the timing of IRS’s release of the guidance, we had insufficient time to evaluate its 

content. See the guidance at http://www.irs.gov/uac/FAQs-Related-to-Ponzi-Scenariosfor-Clawback-Treatment. 
 

Page 53 GAO-12-991 Securities Investor Protection Corporation

We provided a draft of this report to SEC, SIPC, IRS, and the Trustee for 

their review and comment, and each provided technical comments, which 

we have incorporated as appropriate. 

We are sending copies of this report to the appropriate congressional 

committees, the SEC Chairman, the SIPC President, the Commissioner 

of Internal Revenue, and the Trustee for the Madoff liquidation. In 

addition, this report is available at no charge on the GAO website at 

http://www.gao.gov. If you or your staff have any questions regarding this 

report, please contact me at (202)-512-8678 or clowersa@gao.gov. 

Contact points for our Offices of Congressional Relations and Public 

Affairs may be found on the last page of this report. GAO staff who made 

major contributions to this report are listed in appendix V.

A. Nicole Clowers

Director

Financial Markets and

Community Investment

Agency and Third 

Party Comments and 

Our Evaluation
Appendix I: Objectives, Scope, and 

Methodology

Page 54 GAO-12-991 Securities Investor Protection Corporation

This report discusses (1) the extent to which account activity varied by 

type of customer of the failed Bernard L. Madoff Investment Securities, 

LLC firm; (2) the nature of claims filed, and rejected or approved, with the 

Trustee for reimbursement of losses following the firm’s failure due to 

fraud; (3) litigation and settlement activity the Trustee has pursued during 

the subsequent liquidation of the firm, in seeking to recover assets for 

distribution to customers; and (4) the effect of the Madoff fraud on 

customers’ federal income tax liabilities, including the effect on amounts 

that would have been due if investor losses had been based on 

customers’ reported final statement holdings.1

To examine the extent to which account activity varied by Madoff 

customer type, we obtained data files from the Madoff Trustee containing 

account holder names and transaction activity, including deposits and 

withdrawals from April 1981 to December 2008. We calculated 

customers’ net investment status—whether accounts were “net winners,” 

in which customers withdrew more than they had deposited, or “net 

losers,” in which they deposited more than they withdrew—by summing 

transactions for each account.

2

 

1

The Trustee in the Madoff liquidation is Irving H. Picard; the trustee’s counsel is the law 

firm of Baker & Hostetler LLP, of which the Trustee is a member.

Because customer statements are not 

available for earlier dates, the transactions data provided by the Trustee 

contains only transactions on or after April 1, 1981. For accounts opened 

before April 1, 1981, the data lists a deposit for amounts shown on 

customer statements as of April 1, 1981, and we considered these entries 

as deposits for our analysis as well. These deposits totaled about 0.18% 

of all deposits. Based on account names, we classified account holders 

as either individual or family—which we jointly considered as individual—

or institutional, such as charities, pension funds, or investment vehicles 

known as “feeder funds” that collected funds from individual investors for 

deposit with the Madoff firm. Using the account names, we classified as 

individual or institutional more than 99.6 percent of 7,994 accounts we 

2

We excluded from our analysis transactions we identified as instances of the Madoff firm 

debiting foreign account holders for purported U.S. federal income tax withholding and 

paying those amounts to the Internal Revenue Service (IRS). These amounts, totaling 

about $330 million, were later credited to the accounts through a December 2011 

settlement between the Trustee and IRS. 

Appendix I: Objectives, Scope, and 

Methodology 
Appendix I: Objectives, Scope, and 

Methodology

Page 55 GAO-12-991 Securities Investor Protection Corporation

identified with at least one transaction.3

 

3

Specifically, we used a computer program to classify accounts based on keywords we 

identified that were associated with particular types of accounts, such as “JT” (an 

abbreviation of “joint trust,” which indicates an individual or family account) or “pension” 

(denoting a pension plan, which indicates a institutional account). We reviewed the 

automatically classified accounts to identify cases for which the classification was not 

appropriate. For other accounts not containing the keywords we identified, we classified 

them by type in two independent examinations, and then reconciled any differences 

between the two reviews. 

We could not classify 30 accounts 

because the account holder names did not provide sufficient information 

to make a determination. These 30 accounts had a total of $82 million in 

deposits and $117 million in withdrawals, each of which is less than 0.1 

percent of all deposits and withdrawals. Using the account classifications 

and net investment status, we analyzed subgroups of the overall

customer population, to examine potential differences in account activity. 

Specifically, we reviewed deposits, withdrawals, and timing of these 

transactions. In reviewing withdrawals, we also focused specifically on 

withdrawal of principal amounts, as distinct from fictitious profits. This is 

because under his authority to sue for return of assets, the Trustee can, 

among other things, presumptively seek to recover principal withdrawals 

during the 90-day period immediately before the Madoff firm failed. In our 

analysis, we relied on our own examination of data provided by the 

Trustee. The Trustee reviewed our results, noting some small differences 

between our review and his work, but generally confirming our findings. 

Upon further review of our work, we determined that the variances arose 

from differing methodologies and particular algorithms used to conduct 

the analysis. For example, we excluded from our analysis accounts that 

had no transactions, and we counted multiple allowed claims for one 

account as a single allowed claim. Further, in determining whether 

accounts were net winners or net losers, we summed all applicable 

deposits and withdrawals to determine net positions. In a small number of 

cases, this produced very small negative or positive account balances, 

which we considered to be different than zero. We also interviewed the 

Trustee and members of his law firm on customer-type and transactionrelated issues. To assess the reliability of the account and transaction 

data provided by the Trustee, we interviewed members of the trustee’s 

counsel law firm and a contractor that manages the data, reviewed 

reports of the forensic accountants that assembled the data from records 

of the Madoff firm, and examined the data for invalid or missing data 

points. We concluded the data were sufficiently reliable for our purposes.
Appendix I: Objectives, Scope, and 

Methodology

Page 56 GAO-12-991 Securities Investor Protection Corporation

To examine the nature of claims filed and then rejected or approved 

following the Madoff firm’s failure, we obtained claims data from the 

Trustee. We tallied claims received and claims dispositions, while also 

examining the total claims population, and claims outcomes. We matched 

claims information with account information as described above to 

examine claim information by customer type and net investment status. 

As described above, we relied on our own examination of data provided 

by the Trustee. We also interviewed the Trustee and members of his law 

firm on claims-related issues. To assess the reliability of claims data 

provided by the Trustee, we interviewed members of the trustee’s counsel 

law firm and a contractor that manages the data and examined the data 

for invalid or missing data points. We concluded the data were sufficiently 

reliable for our purposes.

To examine litigation and settlement activity the Trustee has pursued 

during liquidation of the Madoff firm, we obtained and analyzed court 

documents covering a range of legal activity. These included: lawsuits 

against net winners that are not alleged to have had knowledge of the 

fraud or been in a position to know about it—referred to by the Trustee as 

“good faith” defendants; lawsuits against individuals and entities the 

Trustee argues knew or should have known about the fraud—referred to 

by the Trustee as “bad faith” defendants; lawsuits against investment 

vehicles that collected funds from investors and invested them with the 

Madoff firm; and agreements the Trustee has reached to settle a number 

of the actions he has filed as part of his asset recovery efforts. We 

selected a random sample of 50 good faith actions for examination, from 

among more than 1,000 cases filed; we reviewed 29 publicly available 

bad faith complaints from among 30 such actions filed, analyzing the 

most frequently cited bases for the Trustee’s allegations of bad faith; we 

examined the largest complaints among 27 actions filed against feeder 

funds; and we reviewed the largest settlements the Trustee had reached 

during his litigation efforts. In addition, we examined Trustee records 

associated with the “hardship program,” in which the Trustee expedited 

claims processing or declined to pursue litigation for customers that could 

demonstrate financial distress. We interviewed the Trustee and members 

of the trustee’s counsel law firm on litigation and settlement issues, and 

we conducted legal research on the Trustee’s legal basis for pursuing 

asset recovery actions. We also interviewed Securities and Exchange 

Commission (SEC) officials and executives of the Securities Investor 

Protection Corp. (SIPC) for their views on conduct of Madoff-related 

litigation.
Appendix I: Objectives, Scope, and 

Methodology

Page 57 GAO-12-991 Securities Investor Protection Corporation

To examine the effect of the Madoff fraud on customers’ federal income 

tax liabilities, including potential differences based on how investor losses 

were calculated, we examined relevant portions of the Internal Revenue 

Code and Internal Revenue Service (IRS) revenue rulings and revenue 

procedures.4

We conducted this performance audit from March to September 2012 in 

accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform our audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that 

the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives.

In addition, we reviewed a September 2011 audit by the 

Department of the Treasury Inspector General for Tax Administration. We 

also interviewed SEC and IRS officials, SIPC executives, and four 

individuals with income tax expertise, including a law professor and three 

tax advisors who we selected based on their tax experience or 

publications related to tax issues.

 

4

A revenue ruling represents IRS conclusions on the application of law to the facts of a 

situation. A revenue procedure is a statement of a procedure that affects the rights or 

duties of taxpayers or other members of the public, or otherwise should be a matter of 

public knowledge.
Appendix II: Trustee Avoidance Actions and 

Other Claims 

Page 58 GAO-12-991 Securities Investor Protection Corporation

Avoidance actions, often called “clawbacks,” enable a bankruptcy trustee 

to set aside certain transfers of property made by the debtor within 

specified periods preceding a bankruptcy filing, in order to recover the 

property for the benefit of the estate and its creditors. These actions are 

authorized by the federal Bankruptcy Code (title 11, United States Code) 

as well as state laws, which section 544(b) of the Bankruptcy Code 

makes available to bankruptcy trustees. Avoidance powers apply fully to 

trustees conducting liquidations under the Securities Investor Protection 

Act (SIPA).1

As discussed below, two types of avoidance actions authorized by the 

Bankruptcy Code are preferential transfers (or preferences) and 

fraudulent transfers. Fraudulent transfers are further subdivided into two 

types: actual fraud and constructive fraud. Individual lawsuits brought by 

trustees can (and in the Madoff liquidation, often do) include preference 

avoidance counts, avoidance counts alleging both constructive and actual 

fraud under the Bankruptcy Code, and avoidance counts arising under 

state law. Indeed, the bankruptcy court has affirmed the Madoff Trustee’s 

right to bring a wide range of avoidance claims under both the Bankruptcy 

Code and New York law.2

A trustee’s avoidance powers are especially strong when the liquidation 

involves a Ponzi scheme. This is because courts have developed a series 

of specific interpretive rules, including the “Ponzi scheme presumption,” 

which work to the advantage of the trustee and to the disadvantage of the 

 

1

Section 6(b) of SIPA, 15 U.S.C. § 78fff(b), makes the Bankruptcy Code generally 

applicable to SIPA liquidations. Section 7(a), 15 U.S.C. § 78fff-1(a), vests in SIPA trustees 

“the same powers and title with respect to the debtor and the property of the debtor, 

including the same rights to avoid preferences, as a trustee” under the Bankruptcy Code. 

In addition, section 8(c), 15 U.S.C. § 78fff-2(c), provides that whenever customer property 

is not sufficient to fully pay all applicable claims, “the trustee may recover any property 

transferred by the debtor which, except for such transfer, would have been customer 

property if and to the extent that such transfer is voidable or void” under provisions of the 

Bankruptcy Code.

2

Picard v. Merkin (In re Bernard L. Madoff Investment Securities LLC), 440 B.R. 243 

(Bankr. S.D.N.Y. 2010), leave to appeal denied, 2011 W.L. 3897970 (S.D.N.Y. 2011).

Appendix II: Trustee Avoidance Actions and 

Other Claims
Appendix II: Trustee Avoidance Actions and 

Other Claims 

Page 59 GAO-12-991 Securities Investor Protection Corporation

recipients of money paid out by Ponzi schemers—particularly when it 

comes to recovering payments that represent fictitious profits.3

Avoidance actions based on preferential transfers, which are governed by 

section 547 of the Bankruptcy Code, enable the trustee to avoid and 

recover payments the debtor made to creditors within 90 days preceding 

the bankruptcy filing, or up to 1 year prior to filing in the case of transfers 

to “insiders.”4 Under section 547(b) of the Code, a trustee may avoid any 

transfer of a property interest of the debtor to or for the benefit of a 

creditor made within the preference period “for or on account of an 

antecedent debt” while the debtor was insolvent, if the transfer enabled 

the creditor to receive more than the creditor would have received without 

it under the bankruptcy distribution. The U.S. Supreme Court has 

observed that preference avoidance is a “mechanism [that] prevents the 

debtor from favoring one creditor over others by transferring property 

shortly before filing for bankruptcy.”5

There are several statutory exceptions to avoidance under section 547(c). 

For example, preference avoidance does not extend to payments of a 

debt incurred by the debtor “in the ordinary course of business.” However, 

the courts consistently hold that the concept of “ordinary course of 

business” has no application in a Ponzi scheme setting and, therefore, 

cannot provide a defense to preference avoidance. Furthermore, 

preference avoidance does not take account of the conduct of the 

recipient. Thus, it applies to all “transferees,” or recipients of transfers, 

including innocent victims of Ponzi schemes.

For the above reasons, a trustee usually has no difficulty avoiding as 

preferential transfers Ponzi scheme payments made during the 

 

3

For a comprehensive description of the legal principles applicable to avoidance actions in 

Ponzi scheme liquidations and how they differ from other bankruptcies, see Mark A. 

McDermott, Ponzi Schemes and the Law of Fraudulent and Preferential Transfers, 73 Am. 

Bankr. L.J. 157 (Spring 1998). 

4

Section 101(31) of the Bankruptcy Code defines “insider” in the case of a company such 

as the Madoff firm to include directors, officers, partners, other persons in control of the 

company, and their relatives. The courts recognize the term “insider” also may extend to 

anyone with a sufficiently close relationship to the debtor that they do not deal at arm’s 

length. See, e.g., In re Longview Aluminum, LLC, 657 F.3d 507, 509-510 (7th Cir. 2011).

5

Begier v. IRS, 496 U.S. 53, 58 (1990).

Preferential Transfers
Appendix II: Trustee Avoidance Actions and 

Other Claims 

Page 60 GAO-12-991 Securities Investor Protection Corporation

preference period. At the same time, the prevailing view is that 

preferential transfer actions can only reach payments that represent 

customer investments of principal in a Ponzi scheme—not fictitious 

profits. In the leading precedent on this subject, the court reasoned that 

since a Ponzi investor does not have a valid claim to fictitious profits, 

payouts based on them are not made on account of an “antecedent debt” 

as required for preference avoidance.6 This limitation has little if any 

practical effect, however, since fictitious profits paid during the preference 

period are recoverable through the fraudulent transfer avoidance actions 

described below.

Avoidance actions based on fraudulent transfers are governed by section 

548 of the Bankruptcy Code. Section 548(a)(1) provides that a trustee 

may avoid any transfer of an interest of the debtor in property made within 

2 years before the filing date— 

A. if the debtor made the transfer “with actual intent to hinder, delay, or 

defraud any entity” to which the debtor was or became indebted; or

B. if the debtor received “less than equivalent value in exchange for” the 

transfer and was insolvent at the time of the transfer, became 

insolvent as a result of the transfer, was engaged in business for 

which the debtor’s remaining property provided unreasonably small 

capital, or met one of several other conditions specified in section 

548(a)(1)(B). 

Section 548 thus provides for two types of avoidance actions. An action 

based on section 548(a)(1)(A) is one for actual fraud. As the language 

indicates, it applies to transfers made by a debtor with actual intent to 

defraud. By contrast, an action based on section 548(a)(1)(B) is one for 

constructive fraud and does not require fraudulent intent on the part of the 

debtor. Instead, the key consideration is whether the transfer was made 

for less than equivalent value while the debtor was insolvent.

As a practical matter, the distinction between actual and constructive 

fraud under section 548 has little significance in the unique context of a 

Ponzi scheme, where the trustee is seeking to recover fictitious profits. By 

 

6

Wooton v. Barge (In re Ronald Cohen), 875 F.2d 508 (5th Cir. 1989).

Fraudulent Transfers
Appendix II: Trustee Avoidance Actions and 

Other Claims 

Page 61 GAO-12-991 Securities Investor Protection Corporation

virtue of the Ponzi scheme presumption, Ponzi scheme payouts are 

generally considered to be actually fraudulent. Case law has held that 

transfers beyond the principal investment lack value, making those 

transfers recoverable under the constructive fraud provisions. Thus, 

transfers of fictitious profits are subject to avoidance as both actual and 

constructive fraudulent transfers.

The concept of fraud under section 548(a) focuses on the debtortransferor rather than the transferees. Thus, all recipients of Ponzi 

scheme payouts, innocent or otherwise, are potentially subject to 

avoidance actions based on both actual and constructive fraud. However, 

the recipients’ status is important in determining the nature and extent of 

their liability. Section 548(c) of the Bankruptcy Code provides that the 

transferee in a fraudulent transfer avoidance action may retain any 

interest transferred upon showing that the interest was taken “for value 

and in good faith.” Principal invested in a Ponzi scheme is considered 

value with respect to a good faith transferee in this context, while fictitious 

profits are not. In general, therefore, the liability of good faith recipients in 

a Ponzi scheme-related fraudulent transfer action will be limited to 

fictitious profits paid to “net winners”—that is, investors who withdrew 

more than they invested in the scheme. Recipients who cannot establish 

their good faith are liable for the return of their principal investment as 

well as any fictitious profits paid out during the 2-year avoidance period.

Good faith in an avoidance action is an affirmative defense, so the 

transferee has the burden of proof.7

“ . . . If the investor knew or should have known that the debtor’s investment scheme was 

too good to be true, then the investor fails to carry his burden of proving that he accepted 

sums from the debtor in good faith, and the trustee is entitled to recover all amounts the 

investor received from the debtor.”

In this regard:

8

Judicial decisions vary on how to apply the “knew or should have known” 

standard. One line of precedent follows an “objective” or “reasonable 

person” test, whereby an investor has a duty to inquire into the legitimacy 

of transactions in the face of “red flags” that would make a reasonable 

 

7

An affirmative defense is an assertion by a defendant, which, if proven, constitutes a 

defense to a charge or complaint.

8

McDermott, note 3, 176-177 (footnotes omitted).
Appendix II: Trustee Avoidance Actions and 

Other Claims 

Page 62 GAO-12-991 Securities Investor Protection Corporation

investor suspicious.9 Under this approach, an investor who fails to inquire 

into suspicious circumstances, or even one who inquires but conducts an 

inadequate inquiry, cannot establish a good faith defense. By contrast, 

other courts have applied a so-called “subjective” test, whereby investors 

are found to have acted in good faith so long as they lacked actual 

knowledge of the fraud or did not “turn a blind eye” in the face of obvious 

signs of fraud.

10 One recent U.S. District Court opinion in a Madoff-related 

case endorsed the subjective test of good faith.11

As noted, a trustee, including a SIPA liquidator, can bring avoidance 

actions under state law as well as the federal Bankruptcy Code. Since the 

Madoff firm was formed as a New York limited liability company with its 

principal place of business there, the Madoff Trustee’s avoidance actions 

include claims under New York’s fraudulent conveyance law, codified in 

sections 270 through 281 of the New York Debtor and Creditor Law 

(DCL) (McKinney 2012).

New York law does not provide for preference avoidance actions. 

However, it does contain fraudulent conveyance provisions that are 

similar to section 548 of the Bankruptcy Code. Sections 273 through 275 

of the DCL are its constructive fraud provisions, authorizing the avoidance 

of transfers made without “fair consideration.”12

“Every conveyance made and every obligation incurred with actual intent, as distinguished 

from intent presumed in law, to hinder, delay, or defraud either present or future creditors, 

is fraudulent as to both present and future creditors.”

Section 276 of the DCL 

provides for the avoidance of transfers based on actual fraud, using 

language similar to section 548(a)(1)(A) of the Bankruptcy Code:

13

 

9

See, e.g., In re Bayou Group, LLC, 439 B.R. 284 (S.D.N.Y. 2010).

10See, e.g., In re Teleservices Group, Inc., 444 B.R. 767 (Bankr. W.D.Mich. 2011).

11Picard v. Katz, 462 B.R. 447 (S.D.N.Y. 2011).

12“Fair consideration” is defined in DCL § 272.

13One potential difference between actual fraud avoidance under the Bankruptcy Code 

and New York law is that DCL § 276 may be interpreted to require a showing of fraudulent 

intent on the part of the transferee as well as the transferor. Court decisions applying § 

276 are inconsistent on this point. See precedents described in Picard v. Merkin, note 2, 

440 B.R. at 257.

Avoidance Actions under 

New York Law
Appendix II: Trustee Avoidance Actions and 

Other Claims 

Page 63 GAO-12-991 Securities Investor Protection Corporation

Additionally, DCL section 276-a provides for the award of attorney fees in 

a successful avoidance action based on actual fraud where fraud on the 

part of the transferee is demonstrated.

The main difference between avoidance actions under the federal 

Bankruptcy Code and the DCL relates to the reach-back period. In 

contrast to the 2-year Bankruptcy Code reach-back, DCL constructive 

fraud avoidance actions are subject to the general 6-year statute of 

limitations in section 213(1) of the New York Civil Practice Law and Rules 

(CPLR) (McKinney 2012).14

Under CPLR sections 203(g) and 213(8), the reach-back period for 

actions based on actual fraud is 6 years before the filing date or 2 years 

from the time the fraud was discovered or could have been discovered 

with reasonable diligence, whichever date is earlier. The Madoff Trustee 

has used this authority to seek avoidance and recovery of fraudulent 

transfers occurring more than 6 years before the filing date where the 

recipients received the transfers in bad faith.

Thus, these actions can reach transfers 

made up to 6 years before the filing date.

Claims by recipients of avoidable payments. Section 502(d) of the 

Bankruptcy Code generally requires disallowance of any claim against the 

bankruptcy estate by the recipient of an avoidable transfer, unless the 

recipient has paid over the avoidable amount. The Madoff Trustee has 

invoked this authority in seeking to temporarily disallow SIPA claims and 

other claims brought by some defendants in avoidance actions.

Subsequent transferees. Under section 550 of the Bankruptcy Code, 

the trustee can seek recovery of the proceeds of an avoided transaction 

from not just the initial transferee but also from “subsequent 

transferees”—third parties who obtained funds from those receiving funds 

directly from the bankrupt entity. Thus, for example, the Madoff trustee 

can maintain avoidance actions against Madoff investors who received 

payouts through feeder funds or other intermediaries. However, there are 

limits to this authority. For example, a trustee cannot recover from a 

subsequent transferee who can show receipt of the proceeds for value, in 

 

14See Dowlings, Inc. v. Homestead Dairies, Inc., 88 A.D.3d 1226, 1229-30, 932 N.Y.S.2d 

192, 196-97 (2011), and cases cited.

Other Considerations
Appendix II: Trustee Avoidance Actions and 

Other Claims

Page 64 GAO-12-991 Securities Investor Protection Corporation

good faith, and without knowledge that the transfer was avoidable. Also, 

an action under section 550 generally must be commenced within 1 year 

after the avoidance of the transfer for which recovery is sought against.

Like the Bankruptcy Code provisions, sections 278 and 279 of the DCL 

authorize avoidance and recovery against subsequent transferees, 

except purchasers for fair consideration without knowledge of the fraud.

Stockbroker safe harbor. One important area of uncertainty concerning 

securities-related Ponzi scheme avoidance actions is the applicability of 

the so-called “stockbroker safe harbor” or “stockbroker defense” provided 

in section 546(e) of the Bankruptcy Code. This provision exempts certain 

securities transactions from avoidance actions except those alleging 

actual fraud.15 Thus far, Madoff-related judicial decisions have reached 

different conclusions regarding the applicability of section 546(e). The 

bankruptcy court held that section 546(e) did not apply to the Madoff 

Ponzi scheme,16 while a district court held that it did.17

A number of lawsuits the Madoff trustee has filed against bad faith 

transferees contain common law claims in addition to avoidance counts 

under the Bankruptcy Code and the New York DCL. These claims 

include, for example, counts for conversion, unjust enrichment, and 

money had and received.

A trustee has the authority and standing to sue to enforce claims that the 

debtor had prior to bankruptcy that represent property of the estate, 

including common law claims.18

 

15Section 546(e) provides in part: “ Notwithstanding sections 544, 545, 547, 548(a)(1)(B) 

and 548(b) of this title, the trustee may not avoid a transfer that is a margin payment . . . or 

settlement payment . . . made by or to (or for the benefit of) a . . . stockbroker . . . or that is 

a transfer made by or to (or for the benefit of) a . . . stockbroker . . . in connection with a 

securities contract, as defined in section 741(7), . . .that is made before the 

commencement of the case, except under section 548(a)(1)(A) of this title.” 

However, two recent U.S. District Court 

decisions dealing with the Madoff liquidation emphasized limits on the 

16Picard v. Merkin, note 2.

17Picard v. Katz, note 11. 

18See, e.g., Bankruptcy Code §§ 321, 541(a); Securities Investor Protection Corp. v. 

Bernard L. Madoff Investment Securities LLC (In re Bernard L. Madoff), 429 B.R. 423 

(Bankr. S.D.N.Y. 2010), aff’d, 848 F. Supp.2d (S.D.N.Y. 2012).

Other Claims
Appendix II: Trustee Avoidance Actions and 

Other Claims 

Page 65 GAO-12-991 Securities Investor Protection Corporation

Madoff Trustee’s ability to pursue common law claims.19 In both cases, 

the courts concluded that the Trustee could not pursue certain common 

law claims that, in the courts’ view, more appropriately belonged to 

creditors rather than the debtor and the estate. Furthermore, with respect 

to debtor claims, the courts noted that Madoff and his firm were 

wrongdoers, and that the Trustee stands in their shoes for purposes of 

pursuing common law claims. Therefore, the courts concluded, such 

claims would be subject to the legal principle that bars resolution of 

disputes between one wrongdoer and another.20

 

19Picard v. JP Morgan Chase & Co., 460 B.R. 84 (S.D.N.Y. 2011), and Picard v. HSBC 

Bank PLC, 454 B.R. 25 (S.D.N.Y. 2011).

20This legal principle against adjudicating wrongdoer versus wrongdoer claims is called “in 

pari delicto.” 
Appendix III: Largest Madoff Accounts by 

Transaction Volume, Total Withdrawals, and 

Net Winnings 

Page 66 GAO-12-991 Securities Investor Protection Corporation

We obtained and analyzed transaction data for customers of the failed 

Bernard L. Madoff Investment Securities, LLC firm. Table 10 shows 

account information and status for the 10 largest Madoff accounts by 

transaction volume.

Table 10: Ten Largest Madoff Accounts by Transaction Volume

(Dollars in millions)

Account namea Transaction 

volumeb

Net 

investment

positionc Final statement account balanced Status 

NORMAN F LEVY C/O 

KONIGSBERG WOLF 

& CO

$222,322 -$61 $0 As part of settlement with Trustee that included 39 

Levy-related accounts, Levy heirs will repay $220 

million in withdrawals of fictitious profits. Settlement 

appealed by other Madoff customers.

CITCO GLOBAL 

CUSTODY N V FBO 

FAIRFIELD SENTRY 

LTD

$8,487 $509 $3,226

Settlement reached covering four accounts, in which 

the funds’ claims were reduced by almost $1 billion, 

while providing $70 million to customer property 

fund. The funds retained allowed claims of $230 

million.

CITCO GLOBAL 

CUSTODY N V FBO 

FAIRFIELD SENTRY 

LTD

$8,453 $554 $3,248

DECISIONS 

INCORPORATED

$6,397 -$6,162 -$5,388 Account owned by Jeffry Picower. Under settlement 

with Trustee, Picower estate agreed to repay all $7.2 

billion in net withdrawals from 34 accounts, $5 billion 

to Trustee and $2.2 billion to U.S. Department of 

Justice. 

FAIRFIELD SENTRY 

LIMITED C/O 

FAIRFIELD 

GREENWICH GROUP

$4,771 $14 -$95

See CITCO GLOBAL CUSTODY N V FBO 

FAIRFIELD SENTRY FAIRFIELD SENTRY LTD, above.

LIMITED C/O 

FAIRFIELD 

GREENWICH GROUP

$4,745 $0 -$95

HARLEY 

INTERNATIONAL 

FUND LTD C/O 

FORTIS PRIME FUND 

SOLUTION

$3,500 $1,279 $2,578 Did not file claim to recover losses. Not involved in 

Madoff-related litigation or settlements.

RYE SELECT BROAD 

MKT FUND LP C/O 

TREMONT PARTNERS

$2,442 $1,648 $2,346 One of accounts of Tremont Group Holdings, Inc. 

Trustee sought to recover $2.1 billion in withdrawals 

by Tremont Group, alleging it knew or should have 

known of warning signs about Madoff firm. Under 

settlement with Trustee, Tremont Group will pay $1 

billion and have allowed claims of $3 billion.

Appendix III: Largest Madoff Accounts by 

Transaction Volume, Total Withdrawals, and 

Net Winnings
Appendix III: Largest Madoff Accounts by 

Transaction Volume, Total Withdrawals, and 

Net Winnings 

Page 67 GAO-12-991 Securities Investor Protection Corporation

Account namea Transaction volumeb

Net 

investment

positionc Final statement account balanced Status 

UBS (LUXEMBOURG) 

SA FBO LUXALPHA 

SICAV 

$2,346 $762 $1,299 Trustee filed complaint seeking recovery of about $2 

billion in withdrawals. Complaint partially dismissed 

by U.S District Court judge.

HSBC SECURITIES 

SERVICES 

(LUXEMBOURG) SA 

SPEC CUST ACCT

$2,313 $1,178 $1,894 Trustee filed complaint seeking $2 billion in 

withdrawals and $6.6 billion in damages. Complaint 

partially dismissed by U.S. District Court judge, and 

Trustee has appealed.

Source: GAO analysis of Madoff Trustee data and court filings.

a

The name listed on the account. Some entities had multiple accounts under the same or similar 

names. Each row in this table represents a single account. 

b

The sum of all deposits and withdrawals. 

c

The net investment position of the account at the time of the Madoff firm failure. Positive net 

investment positions represent deposits in excess of withdrawals; negative net investment positions 

indicate withdrawals in excess of deposits. 

d

The account balance listed on the final statement for the account. 

Table 11 shows account information and status for the 10 largest Madoff 

accounts by total withdrawals.

Table 11: Ten Largest Madoff Accounts by Total Withdrawals

(Dollars in millions)

Account namea Total withdrawalsb Total depositsc Net investmentpositiond Final statement account balancee Status 

NORMAN F LEVY C/O 

KONIGSBERG WOLF & 

CO

$111,126 $111,192 -$61 $0 See NORMAN F LEVY C/O 

KONIGSBERG WOLF & CO 

in table 10 above.

DECISIONS 

INCORPORATED

$6,279 $117 -$6,162 -$5,388 See DECISIONS 

INCORPORATED in table 10 

above.

CITCO GLOBAL CUSTODY 

N V FBO FAIRFIELD 

SENTRY LTD

$3,989 $4,497 $509 $3,226

See CITCO GLOBAL 

CUSTODY N V FBO 

FAIRFIELD SENTRY LTD in 

table 10 above.

CITCO GLOBAL CUSTODY 

N V FBO FAIRFIELD 

SENTRY LTD

$3,949 $4,504 $554 $3,248

FAIRFIELD SENTRY 

LIMITED C/O FAIRFIELD 

GREENWICH GROUP

$2,378 $2,392 $14 -$95

FAIRFIELD SENTRY 

LIMITED C/O FAIRFIELD 

GREENWICH GROUP

$2,373 $2,373 -$0 -$95
Appendix III: Largest Madoff Accounts by 

Transaction Volume, Total Withdrawals, and 

Net Winnings 

Page 68 GAO-12-991 Securities Investor Protection Corporation

Account namea Total 

withdrawalsb Total depositsc Net investmentpositiond Final statement 

account balancee Status 

HARLEY INTERNATIONAL 

FUND LTD C/O FORTIS 

PRIME FUND SOLUTION

$1,111 $2,389 $1,279 $2,578 See HARLEY 

INTERNATIONAL FUND 

LTD C/O FORTIS PRIME 

FUND SOLUTION in table 10 

above.

RYE SELECT BROAD 

MARKET PRIME FUND, LP

$1,010 $799 -$211 $596 See RYE SELECT BROAD 

MKT FUND LP C/O 

TREMONT PARTNERS in 

table 10 above. 

UBS (LUXEMBOURG) SA 

FBO LUXALPHA SICAV

$752 $1,554 $802 $1,299 See UBS (LUXEMBOURG) 

SA FBO LUXALPHA SICAV 

in table 10 above.

ASCOT PARTNERS LP $748 $974 $226 $1,862 One of the feeder funds 

created by J. Ezra Merkin. As 

part of settlement with New 

York Attorney General, 

Merkin agreed to pay $405 

million to certain customers. 

Trustee filed separate 

complaint, seeking $500 

million in withdrawals, and is 

seeking injunction against 

the settlement between 

Merkin and clients, arguing it 

violates automatic stay 

provisions of Bankruptcy 

Code and stay orders of 

district court. 

Source: GAO analysis of Madoff Trustee data and court filings.

a

The name listed on the account. Some entities had multiple accounts under the same or similar 

names. Each row in this table represents a single account. 

b

The sum of all withdrawals made from the account. 

c

The sum of all deposits made into the account. 

d

The net investment position of the account at the time of the Madoff firm failure. Positive net 

investment positions represent deposits in excess of withdrawals; negative net investment positions 

indicate withdrawals in excess of deposits. 

e

The account balance listed on the final statement for the account. 

Table 12 shows account information and status for the 10 largest Madoff 

accounts by “net winnings,” that is, the amount by which an account 

holder withdrew more than they invested in the Madoff firm.
Appendix III: Largest Madoff Accounts by 

Transaction Volume, Total Withdrawals, and 

Net Winnings 

Page 69 GAO-12-991 Securities Investor Protection Corporation

Table 12: Ten Largest Madoff Accounts by Net Winnings

(Dollars in millions) 

Account namea Transaction volumeb Net investmentpositionc

Final 

statement 

account 

balanced Status 

DECISIONS INCORPORATED $6,397 -$6,162 -$5,388 See DECISIONS INCORPORATED in table 10 

above.

JEANNE LEVY-CHURCH $742 -$573 -$1,699 Account associated with Norman F. Levy. See 

NORMAN F LEVY C/O KONIGSBERG WOLF 

& CO in table 10 above. 

THE LAMBETH CO $649 -$378 $402 Among accounts owned or associated with 

Stanley Chais. Trustee seeking repayment of 

$1.2 billion in withdrawals.

JA PRIMARY LTD 

PARTNERSHIP

$287 -$250 $0 Most recent transaction was 1996, and 

account not involved in litigation. 

THE PICOWER FOUNDATION $367 -$242 $598 See DECISIONS INCORPORATED in table 10 

above.

THE BRIGHTON COMPANY $367 -$233 $384 See THE LAMBETH CO above. 

AVELLINO & BIENES #5 C/O 

FRANK AVELLINO

$299 -$213 $0 Account used by feeder fund created by Frank 

Avellino and Michael Bienes; the first Madoff 

feeder fund, according to Trustee. Trustee is 

seeking repayment of $905 million in 

withdrawals from accounts associated with 

Avellino and Bienes. 

RYE SELECT BROAD MARKET 

PRIME FUND, LP

$1,809 -$211 $596 See RYE SELECT BROAD MKT FUND LP 

C/O TREMONT PARTNERS in table 10 above.

CARL SHAPIRO TRUST U/D/T 

4/9/03

$547 -$201 $56 Among accounts owned by Carl Shapiro or 

family. Family agreed to $625 million 

settlement, which is lower than $1 billion 

Trustee sought to recover withdrawals of 

fictitious profits. Shapiro family contended 

Trustee did not properly account for $500 

million in deposits.

FRANCIS N LEVY C/O 

KONIGSBERG WOLF & CO PC

$378 -$193 -$1,149 Account associated with Norman F. Levy. See 

NORMAN F LEVY C/O KONIGSBERG WOLF 

& CO in table 10 above. 

Source: GAO analysis of Madoff Trustee data and court filings.

a

The name listed on the account. Some entities had multiple accounts under the same or similar 

names. Each row in this table represents a single account. 

b

The sum of all deposits and withdrawals. 

c

The net investment position of the account at the time of the Madoff firm failure. Positive net 

investment positions represent deposits in excess of withdrawals; negative net investment positions 

indicate withdrawals in excess of deposits. 

d

The account balance listed on the final statement for the account. 
Appendix IV: Details of Settlements by the 

Madoff Trustee

Page 70 GAO-12-991 Securities Investor Protection Corporation

In hundreds of cases, the Madoff Trustee has reached settlements with 

former customers and others, either before or after filing clawback 

actions, and these agreements have produced recovery of a significant 

amount of assets. This appendix provides details of these settlements, 

including amounts sought and obtained, the extent to which settlements 

have been paid, strategies behind settlements, and key provisions.

As of April 2012, the Trustee had entered into 441 settlement agreements 

in which the opposing parties agreed to return about $8.4 billion—an 

amount equal to about 49 percent of the approximately $17.3 billion in 

principal investments lost by customers who filed claims. Based on a 

bankruptcy court review threshold, we examined all but one settlement 

agreement worth at least $20 million.1

 Table 13 provides a summary of 

the 13 settlements we identified. These settlements account for more 

than 97 percent of all settlement amounts. They include settlements from 

family estates, such as Picower, Shapiro, and Levy, as well as feeder 

funds, in the case of UBP, Optimal, Fairfield, Mount Capital, and Trotanoy 

Investment.2 The group also includes settlements with charitable 

foundations and the federal government. As the table shows, the amounts 

collected by individual case vary widely.

 

1

The $20 million Hynes settlement (see table) was sealed for confidentiality, with the 

Trustee having filed no adversary action. Thus, details were unavailable to us.

2

Feeder funds are investment vehicles that collected money from investors and channeled 

the funds to the Madoff firm.

Appendix IV: Details of Settlements by the 

Madoff Trustee
Appendix IV: Details of Settlements by the 

Madoff Trustee

Page 71 GAO-12-991 Securities Investor Protection Corporation

Table 13: Madoff Settlement Agreements of at Least $20 Million

(Dollars in millions) 

Case Case type

Amount initially 

sought

Settlement 

amount

Settlement 

amount as 

percentage of 

all settlements

Payments 

received as of 

July 2012

Percentage of 

settlement 

received

Picowera Investor $7,200 $5,000 59.6% $5,000 100%

Tremont Feeder fund $2,100 $1,025 12.2 0 

Shapiro Investor $1,045 $550 6.6 $550 100

UBP Feeder fund $1,000 $470 5.6 $470 100

IRSb Government $326 $326 3.9 $326 100

Optimal Feeder fund N/Ac $233.8 2.8 $233.8 100

Levy Investor $221 $220 2.6 $220 100

Katz-Wilpon Investor $1,018 $162 1.9 0 

Fairfield Feeder fund $3,054 $70 0.8 $18.3 26.2

Hadassahd Charitable 

foundation

$77 $45 0.5 $45 100

Mount Capital Feeder fund $46 $43.5 0.5 $43.5 100

Trotanoy 

Investment

Feeder fund $182.4 plus 

damages at trial

$29 0.3 0 

Hynes N/A N/A $20 0.2 $20 100

Total $8,194 97.6% $6,927 84.5%

Source: Madoff Trustee, GAO analysis. 

a

The Picower settlement totals $7.2 billion and has two parts: $5 billion for the Trustee and $2.2 billion 

for the U.S. Department of Justice civil forfeiture program. The Trustee told us that in the case of such 

dual settlements, the Trustee first obtained his desired settlement, and then any other amounts were 

added on. Thus, amounts recovered by other parties did not reduce amounts obtained by the 

Trustee, he said. 

b

To recover purported tax withholdings Madoff made for foreign investors. The Trustee said Madoff 

collected and paid more than $330 million to IRS, but some foreign account holders settled separately 

with the IRS before the Trustee reached his agreement. The Trustee’s settlement with IRS reflects 

the balance. 

c

Clawback action not filed; no amount formally sought. 

d

As discussed earlier, the Trustee alleged Hadassah received at least $77 million in avoidable 

transfers, but settled at the lower amount in consideration of the organization’s charitable activities. 

Among these settlements, the Optimal case has played an influential role, 

the Trustee told us. Optimal was the sponsor of two feeder funds, and it 

was an early case with potentially risky legal issues present, such as 

jurisdiction and foreign entities—it was not clear the U.S. Bankruptcy 

Code or SIPA apply outside the United States, the Trustee told us. The 

Trustee secured an agreement requiring Optimal to return 85 percent of 

amounts received during the 90-day preference period. Included was a 
Appendix IV: Details of Settlements by the 

Madoff Trustee

Page 72 GAO-12-991 Securities Investor Protection Corporation

term providing that if the Trustee settled with another party on more 

advantageous terms, Optimal would also receive those terms.

The 85 percent figure effectively became the benchmark for settlements 

of similar claims, the Trustee told us. In turn, the Trustee also set a 

complementary benchmark for good faith claims at 95 percent, in 

consideration of the comparative ease in making such cases compared to 

bad faith actions. The Trustee told us that in the Optimal settlement, he 

considered it important to secure the agreement in order to build the 

customer fund. However, looking back, he said the “most favored nation” 

provision has been an issue. Optimal recently attempted to invoke the 

clause following the Trustee’s recent settlement with Hadassah. Due to 

the complexity of these cases, it is difficult to discern what constitutes a 

settlement to which the clause would apply, the Trustee said.

Based on our examination of the largest settlement agreements, table 14 

provides a summary of key settlement provisions.

Table 14: Key Provisions among Largest Madoff Settlements 

Settlement Key provisions

Optimal “Most favored nation” clause where Optimal agreed to pay 85 percent of 

amounts received during 90-day preference period, but if another party 

gets more favorable agreement, Optimal gets those terms. 

Fairfield $1.2 billion in customer claims reduced to $230 million. Trustee and 

liquidator of feeder funds involved agreed to share in recoveries from 

feeder funds’ officers and management companies involved. Trustee 

said partnership aligns interests of both parties and enhances prospects 

of recovery. 

Tremont Defendants do not share in settlement proceeds, as they forego profits 

through fees, earnings, management expenses. Trustee says refusal to 

“settle cheap”—initial settlement offer was $176 million, versus $1.025 

billion eventually obtained—established credibility. 

IRS IRS agreed to return to Trustee funds Madoff had collected from foreign 

account holders as income tax withholdings. Foreign account holders 

cannot bring actions against IRS, United States, or the Trustee in the 

future.

Katz-Wilpon Claims defendants had following collapse of Madoff firm become assets 

to fund settlement. Katz and Wilpon personally guarantee up to $29 

million if other defendants do not pay.

Hadassah Settled $77 million case for $45 million, to avoid causing failure of Israeli 

hospital funded by defendant.

Picower, Levy Recovered all, or nearly all, of eligible fictitious profits; parties’ claims for 

losses also withdrawn. 

Source: Madoff Trustee and GAO review of settlement agreements filed by the Trustee.
Appendix IV: Details of Settlements by the 

Madoff Trustee

Page 73 GAO-12-991 Securities Investor Protection Corporation

The Trustee’s settlement agreements also go beyond simply obtaining 

cash agreements, we found, as allowance of customer claims and SIPC 

advances have also been key components of settlements of feeder fund 

cases. For example, the Tremont settlement, in addition to its $1.025 

billion settlement amount, also included allowing more than $3 billion in 

customer claims and granting SIPC advances for eligible accounts. With 

the exception of the Katz-Wilpon case, all seven settlements that included 

allowed customer claims as part of the agreement were feeder fund 

cases. Because these feeder funds were net losers, the settlement 

agreements granted SIPC advances to each of the funds that directly

held Madoff accounts. In the Katz-Wilpon agreement, the allowed 

customer claim was assigned to the Trustee, so that customer 

distributions will fund the $160 million settlement payment.

For both the Picower and Levy settlements, the Trustee told us he 

believed he obtained the largest sums possible. The $5 billion settlement 

in the Picower case represents 100 percent repayment of funds received 

by the Picower estate and related investors named in the complaint. 

Similarly, the Levy settlement, reached before litigation was filed, 

represents nearly 100 percent of the amounts the Levy account holders 

withdrew during the 6 years prior to the Madoff firm’s collapse.3

Additionally, both Picower and Levy withdrew their customer claims as 

part of the settlements, the Trustee said.

 

3

This does not include $84 million paid to the Levy foundation, which the Trustee did not 

seek to recover, because the funds had been donated to charitable causes.
Appendix V: GAO Contact and Staff 

Acknowledgments

Page 74 GAO-12-991 Securities Investor Protection Corporation

A. Nicole Clowers, (202) 512-8678 or clowersa@gao.gov

In addition to the contact named above, Cody J. Goebel, Assistant 

Director; Donald W. Brown; Daniel S. Kaneshiro; Jonathan M. Kucskar; 

David J. Lin; Marc W. Molino, Barbara M. Roesmann; Christopher H. 

Schmitt; Andrew J. Stephens; Ethan S. Wozniak; and Henry R. Wray 

made major contributions to this report.

Appendix V: GAO Contact and Staff 

Acknowledgments 

GAO Contact

Staff 

Acknowledgments

(250668)
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