There's a $4 billion pot of cash at the Department of Justice for victims of Bernie Madoff's Ponzi scheme.
Thousands of his victims have been trying to tap the fund since it was set up three years ago but haven't seen a penny. Many are elderly and live modestly. Some lost their life savings in the scam.
One of them, a 50-year-old technology consultant in California, said he filed a claim in 2013 for the $250,000 he lost in the fraud. Two years later he got a letter telling him a "formal determination notice" would be sent. He's still waiting.
The more fortunate filed claims with Irving Picard, the trustee who liquidated Madoff's investment firm in bankruptcy court. Picard has collected $11 billion and paid $8.6 billion to 2,500 investors since 2011.
For those facing a seemingly interminable wait, relief is on the way from the Justice Department pool of about $4 billion, its administrator, Richard Breeden, said in an interview Thursday. As many as 40,000 victims may get initial payments by the end of the year, he estimated, given the rate of claims approved so far.
"The process is more careful and takes longer than any victim might wish," said Breeden, 66. "The good news is that tens of thousands of victims will get paid at the end of that process who otherwise would not receive anything."
But what's taking so long?
Breeden, who has hired about 50 people to work with him on the Madoff Victim Fund, has had to review claims from tens of thousands of indirect investors — people who placed money in feeder funds that invested with Madoff. Picard didn't review such claims, treating the feeder funds themselves as the investors and leaving it to them to pay back their customers. He rejected 85 percent of claims, including almost 11,000 people who had invested with the middleman funds.
Both men have operated within the bounds set for them, whether by the Department of Justice or by bankruptcy law.
That has left Breeden analyzing 64,000 claims from around the world. His review didn't begin until after his appointment in December 2012 and involves many more claimants than those eligible for payments by Picard, who has a team of 200 lawyers.
"I hear they got a claim from every Tom, Dick and Harry. In a sense, they have my sympathy," said Daniel Krasner, a lawyer with Wolf Haldenstein Adler Freeman & Herz in New York who represents some Madoff victims in a lawsuit against their feeder fund.
Still, Picard — who began work weeks after Madoff's arrest and had to unravel the fraud and pilot masses of litigation to secure funds for the victims — had paid out more than $5 billion after three years.
"We work as hard as we can to complete the claims review accurately and as fast as possible," Breeden said. "But we can't short-circuit a careful review of the claims. I can't just wave a wand and make payments based on guesses."
To determine whether a claim is eligible, Breeden's first, simple test is one that Picard must also follow: whether someone put in more money than he or she took out.
Breeden will eventually make recommendations to the Justice Department's Asset Forfeiture and Money Laundering Section in Washington over which claims to fund and which to deny.
Through Dec. 4, the Madoff Victim Fund had reviewed 51,071 claims, with 13,052 to go. Of those reviewed, 20,241, or 40 percent, have been recommended for approval. An additional 47 percent were still under review, and 13 percent were deemed ineligible.
The fraud, which prosecutors said started as early as the 1960s, involved millions of pages of fake trades and account documents that were used to convince customers that they owned securities in the biggest U.S. companies. Their final account statements included about $47 billion in fake profit.
Madoff, 77, pleaded guilty in 2009 and is serving a 150-year prison term in North Carolina. His case was the subject of a two-night miniseries last week on ABC, starring Richard Dreyfuss as Madoff.
Days after Madoff's arrest, Picard, a lawyer at Baker & Hostetler in New York, was hired by the Securities Investor Protection Corp., an industry-financed group that seeks to make investors whole after frauds.
He in turn hired lawyers, forensic accountants and other professionals to determine who held valid claims — by their standard, those who had directly deposited more money than they took out.
Picard has filed more than 1,000 lawsuits against banks, feeder funds, investors and others who profited from the scam, mostly unwittingly, to help repay victims.
He made the first distribution to customers in 2011, doling out $677 million. In one suit he claimed that Jeffrey Picower, a sophisticated investor who withdrew more than $7.2 billion, should have known it was a fraud. Picower was found at the bottom of his swimming pool in 2009, dead of a heart attack.
The following year his widow, Barbara Picower, agreed in a settlement to hand over the whole $7.2 billion, saying she hoped it would ease the "tragic impact" the fraud had had on victims. Picard's fund got $5 billion, and $2.2 billion went to a fund overseen in Manhattan by U.S. Attorney Preet Bharara, who had prosecuted Madoff. Bharara later added $1.7 billion that JP Morgan Chase paid to avoid prosecution over its role in the fraud.
A spokeswoman for Picard, Amanda Remus, said she couldn't compare Picard's work — which is based on the U.S. bankruptcy code, the Securities Investor Protection Act and the courts — with Breeden's. These authorities, she said, "have provided the trustee with clear direction on how allowed claims can be paid accurately, fairly and in a timely manner."
Picard's lead lawyer, David Sheehan, said that individual, indirect investors in feeder funds still benefit from those distributions and that Picard took "extensive steps to ensure that the money received by the feeder fund is distributed to its investors."
Picard has produced "unprecedented recoveries and distributions" that are all the more notable, Sheehan said, because Madoff's company didn't keep records on the identity of investors in the feeder funds or the amounts each fund invested with Madoff.
Breeden, once chairman of the Securities and Exchange Commission, has plenty of experience in helping victims of massive frauds get compensation. He served in similar roles for victims of frauds at Enron Corp., WorldCom Inc. and Adelphia Communications Inc.
He said one woman invested the bulk of her life savings with a feeder fund three weeks before Madoff's arrest. Her claims were denied by Picard because she was an indirect investor, and the fund she invested with was denied because it made more money with Madoff than it lost.
"The answer in bankruptcy is 'We're sorry, you're not eligible,'" he said. "That's the right answer under that law. But we can get her a recovery."
"The process is more careful and takes longer than any victim might wish. The good news is that tens of thousands of victims will get paid at the end of that process who otherwise would not receive anything."
Richard Breeden, administrator, Justice Department fund for victims of Bernie Madoff's Ponzi scheme