Picard, who said there's no evidence Madoff bought any securities for his investors for at least 13 years, has so far managed to recover less than $1 billion in assets. While the pot will grow with the planned sale of a Madoff business that matched stock market buyers and sellers — as well as efforts to claim funds from any confederates with complicity in the alleged fraud — the recovery effort is likely to come up short.
Even the prospect of as much as $500,000 in repayment for each customer account from the Securities Investor Protection Corp., a federally established, insurance-like program, won't be enough to fully repay Madoff investors.
"There will be a shortfall somewhere along the line," Sheehan told creditors during the meeting.
Moreover, some of those who now count themselves as Madoff victims could find themselves being pursued by the trustee, because they withdrew phantom "profits" that exceeded their investments.
In a legal procedure known as a claw-back, Picard can attempt to force some of those investors to return the money. Federal or state laws authorize him to target any "preference" repayments made within 90 days of the December collapse of the alleged fraud, plus so-called fraudulent transfers stretching back as long as six years.
"You have to realize you got somebody else's money," said Sheehan, describing what he called the "sharing the pain" procedure to Madoff clients.
But even dozens of successful claw-backs — such as those that raised millions for repayments in the 2005 Bayou Management case, a hedge fund that collapsed from a multiyear fraud — would represent little more than a financial Band-Aid for victims in a case as massive as the alleged Madoff scam.
"The unfortunate reality is that in most of these massive frauds, the recovery for investors is very small. It's often less than 10 cents on the dollar," says Keith Dutill, a partner at Stradley Ronon Stevens & Young in Philadelphia who helped a court receiver recover $75 million for investors defrauded by the collapse of a Cayman Islands hedge fund.
Madoff 'could be left penniless'
Consider developments in the proposed class-action lawsuit that Uniondale, N.Y., attorney Mark Mulholland's law firm filed against Madoff on behalf of Kellner, the chief economist for MarketWatch and proposed lead plaintiff. Docketed one day after Madoff's Dec. 11 arrest, the case grabbed instant headlines.
But Picard's appointment legally blocked individual claims against Madoff, as well as any other potential recovery targets the trustee might pursue, Mulholland says. How much might a class-action case eventually recover?
"That certainly is an open question. Once Mr. Madoff resolves his problems with the U.S. Attorney's office and any other governmental entity that has jurisdiction, he could be left penniless," says Mulholland.
That's one reason he left room for 100 "John Does" as potential co-defendants in the case. "It quite well could be that one of them would become most interesting from a financial recovery perspective," says Mulholland.
Victor Stewart, a lawyer representing Anwar, an international finance executive who lives near Chicago, says he recognized that the chance of a significant recovery from Madoff was low.