Chasing Bernie’s Billions: Inside the Most Successful Asset Recovery Effort in History

July 23, 2021


On December 11th, 2008 Bernie Madoff was arrested by the FBI in his Manhattan home and criminally charged with a multi-million-dollar securities fraud scheme. So began the most comprehensive and successful financial investigation and asset search in history. The Securities Investor Protection Corporation (“SIPC”) Trustee and Baker Hostetler have continued their tireless search for assets ever since, and the numbers associated with their work are truly staggering. The Trustee has recovered a combined total of $14.402 billion in settlements and recoveries and has distributed $13.32 billion to victims. This recovery amounts to 75 cents on the dollar of the approximately $20 billion in principal lost to the Madoff Ponzi scheme. Recoveries this high are unheard of in Ponzi schemes and bankruptcies and not anticipated at the outset of this investigation.


I discussed the asset search and financial investigation with BakerHostetler partner Seanna Brown on an episode of the Fraud Eats Strategy podcast series.  

Seanna explained thatMadoff told investors that he would put their investments into a split strike conversion strategy which he described as a diversified basket of blue-chip stocks that outwardly appeared to be safe bets. He elaborated that these stocks were then hedged with stock market index put and call options, which would protect investors in the event of a significant market decline. The volume of money that Madoff took in would have made the trading size comprising his split-strike between seven and 65 times the size of the actual market for those derivative instruments at various points in time. Of all the red flags that portended the eventual collapse of Madoff’s Ponzi scheme, this was the most stunning.

Many people assume that the Madoff fraud came to light because of trading losses and the need to conceal them or something else that was negatively impacting the company. Seanna and her colleagues quickly realized that none of the investors’ money had been invested in securities.

The first few days of any liquidation following a collapse of a broker are always very chaotic, especially when you add in the criminal component and the SEC. Mr. Madoff had said that he owed his customers $65 billion worth of assets. One of the first things the Trustee’s team did was try to determine what the broker owed its customers and whether there was $65 billion under management. They immediately looked at each bank account and all the securities positions expecting to find billions of dollars of securities. Their first call was to the Depository Trust & Clearing Corporation (DTCC), which is the clearing corporation for securities. The Trustee found out that Madoff had $12 million worth of securities for which DTCC was acting as custodian. This was their first inkling that Mr. Madoff was running a fraud of epic proportions. The team then found about $500 million in the bank accounts associated with the investment advisory business and the market-making desk.  In total, there was between $500 and $600 million available – not the $65 billion figure Madoff stated he owed his customers.

There were multiple government agencies involved with the investigation in addition to the Trustee. Many people struggle to understand the different roles of the Department of Justice, the FBI, the SEC, SIPC and the SIPA Trustee in this case. Of particular interest is how the criminal and civil asset forfeiture cases brought by the FBI and the DOJ dovetailed with the Trustee’s own efforts to recoup money for victims. There was a great deal of overlapping jurisdiction, which is not altogether unusual when you have both a criminal and a civil component to a case. What makes this case interesting and different from other cases is the way it came to light. Unlike many cases, this wasn’t a case that the DOJ built from the ground up with informants or wiretaps, it simply landed on their doorstep when Madoff confessed to his sons who then walked into the U.S. Attorney’s Office which then triggered the criminal investigation.  At the same time, the SEC filed their actions, SIPC filed its protective decree and, Irving Picard was appointed as Trustee.

One of the things that set the tone for this case was the public outcry when Mr. Madoff was released on bail. From the point forward, the Bureau and the U.S. Attorney’s Office took an aggressive stance for the victims and the way they thought they could best achieve that was through the federal asset forfeiture laws. Asset forfeiture is a strong tool for the Department of Justice in situations in which they can show that the assets are the proceeds of a crime. Under the Madoff Ponzi scheme, it was pretty obvious that all of the money was the proceeds of securities fraud.

Another thing that helped set the tone and define the relationship between different government agencies is the fact that SIPA funds all of the recovery efforts. It is unlike an SEC receivership or a traditional bankruptcy that can be costly. The Securities Investor Protection Corporation was paying all of the administrative expenses associated with the asset recovery efforts. This has allowed 100 percent of the proceeds of the asset recovery efforts to be returned to the customers who were defrauded. The combined efforts of the SIPC Trustee, FBI and SEC led to an almost unprecedented recovery of 75on the dollar. It totaled $14.42 billion against a total of approximately $20 billion that was stolen from investors.  That initial $65 billion figure was a fiction which factored in years of profits and dividends Madoff had been telling his customers they had earned on their investments.  

So why was this asset recovery effort so successful when so many have not been?  First and foremost, they had the backing of SIPC which does make this type of liquidation proceeding unique in that they were very well funded. SIPC-appointed Trustees can give back every single cent that is recovered to compensate victims. None of the expenses associated with building a team of attorneys and forensic accountants were taken off the top. This enabled the Trustee to build a strong team of professionals. With that team, they were able to dig very deeply into Mr. Madoff’s fraud, reconstruct the books and records, reconstruct the fraud and put together incredibly strong complaints. Once the feeder funds and other investors who took out more than they put in saw the strength of the claims, many of them contacted the Trustee to negotiate settlements.  The settlements were being resolved more favorably for these investors. It was better than if they had been decided in litigation which further accelerated settlements with other parties who may have been on the fence. Also contributing greatly to the success of the recovery effort was the fact that customers who agreed to pay back what they owed to the estate and could then get paid out on the remainder of their claims – the amounts of their original investment principal.

While the recoveries and settlements in this case, are eye-popping, but there were some other amazing statistics. The Trustee filed over 1000 civil suits before the statute of limitations tolled in 2010.  In total, the Trustee filed 1100 suits related to Madoff’s fraud and have settled nearly 900 to date.  And those settlements have resulted in recoveries amounting to over $14 billion.

The volume of information that the Trustee, counsel and forensic accountants had to go through was incredibly daunting. The business had been in existence since the 1960s and, it appeared that they did not have a document destruction policy or, if they did, no one was following it. They kept every business record the company had ever generated. The business had three floors of the famed Lipstick Building – the 17th, 18th, and 19th floors. The 17th floor is where the fraud occurred and, the 18th and 19th floors were for the trading desks that did engage in real trading. There was a large amount of electronic media on those three floors, computers, electronic documents and many thousands of documents. There was a basement in the building and, it was full of boxes. There were two warehouses also full of boxes. In total, the Trustee collected about 10,000 boxes of paper documents and thousands of reels of microfiche and microfilm. Madoff Securities’ business records made up over four terabytes of information, but the data collection did not stop there.

Throughout the litigation, the Trustee collected over 5 million documents from different parties, either through the claims process or litigation and 400 depositions with 200 cases that are still pending in the pre-discovery stage.

Another interesting and perhaps lesser-known fact about the investigation is that Irving Picard and Dave Sheehan, The Trustee and Chief Counsel for the length of the Trusteeship made the Madoff Recovery Initiative into a platform for inclusion. Diversity is in the legal profession has been become an area of increased focus and attention. Who is going to court and who has speaking roles matters a great deal.  This has been discussed extensively throughout the bar. Many judges established new rules intended to provide opportunities for a diverse set of attorneys to have courtroom speaking opportunities. David Sheehan and Irving Picard empowered women and diverse attorneys to play leading roles in the Madoff Recovery Initiative. In the legal profession, there are mentors and, there are sponsors.  A mentor is someone that you can go to for advice. A sponsor is somebody who’s going to fight for you, who is going to say: “I want to put you in front of a client”, “I want you to take that deposition” or “I want you to be in court” and then follows through and makes sure those opportunities become a reality.

David Sheehan and Irving Picard embraced the sponsorship mentality as opposed to just being mentors. They pushed for people to be in these high-profile roles, gave people experience and they continue to do so.  As a result, the Madoff Recovery Initiative isn’t just a wildly successful asset recovery, it has also been a model for inclusion in the legal profession. 

To hear both of the full Fraud Eats Strategy podcast episodes with Seanna Brown, click here and here:

Note: The postings on this site are my own and do not necessarily represent White Collar Forensic’s positions, strategies or opinions

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