Madoff victims trade on trustee's gains and losses

(Reuters) - After Bernard Madoff's fraud unraveled in late 2008, Yale Fishman was courted by Wall Street traders seeking to buy his claim to assets that could be recovered from the mess. After three years of ignoring their calls, he finally said yes.

Fishman, an estate planner in Woodmere, New York, and a former Madoff investor, cut a deal with a trading firm to sell part of his bankruptcy claim in the long-running case. He said he sold his $1.1 million claim for $800,000, or about 73 cents on the dollar, in late December.

"I held it for a while, but they keep calling you up and soliciting you," he said. "And I figured I should sell it because I was planning for my kids," said Fishman, whose sale could not be independently verified.

As in many bankruptcies, the collapse of Madoff's financial empire spawned a mini-market of trading in the rights to any potential recoveries. Bankruptcy claims trading in the Madoff case has moved in fits and starts since Madoff was arrested, with claims currently trading in the range of 60 cents on the dollar, according to levels quoted by traders.

Recent setbacks by the court-appointed trustee trying to recoup assets on Madoff victims' behalf - combined with frustration over the trustee's legal and other fees, which to date total more than $550 million and counting - are encouraging some former Madoff customers to unload their claims. Most original Madoff claims sellers are ordinary investors, not the lenders, debt holders or vendors who are the typical sellers in other claims-trading situations.

A bankruptcy claim is essentially an IOU that gives the holder the right to a portion of any assets later recovered. The seller gets cash upfront rather than potentially waiting years for a payback, while the buyer - typically a hedge fund or bank - pays a discount to the face value of the claim in hopes of ultimately recouping more.

Claims trading has long been a Wall Street niche. Past examples of significant claims-tradings markets include those stemming from the collapse of Enron Corp. and Lehman Brothers Holdings Inc. More recently, buyers have been snatching up MF Global Holdings Ltd (>> MF Global Holdings Ltd) customer claims.

While claims trading is always a bet on the value of the bankrupt estate, trading in Madoff claims has become almost a pure bet on what the trustee, lawyer Irving Picard, can recover through his myriad court battles.

So far, Picard has won settlements of $9.1 billion through lawsuits against groups and individuals he has accused of turning a blind eye to Madoff's crimes and profiting from his scheme. Much of that money is tied up in litigation over payout calculations, however, and cannot be distributed. So far, Madoff investors have only received payments of $330 million.

Picard's office has said Madoff customers ultimately could get a full recovery of the more than $17 billion in approved claims. Picard spokeswoman Amanda Remus declined to comment on claims-trading activity or prices.

Remus said the trustee and his legal team have gotten "an extraordinary result" through their work "in reconstructing from nothing the facts and scope of the Madoff fraud and achieving record recoveries." She also said the trustee's fees are paid through funds from the Securities Investor Protection Corp., a nonprofit group that charges fees to broker-dealers, not from recoveries intended for Madoff victims.

It's unclear how many Madoff investors have sold their claims, or at what prices. Because Madoff's firm, Bernard L. Madoff Investment Securities LLC, was unwound under the auspices of SIPC instead of through a Chapter 11 bankruptcy, there is no legal requirement for claims trades to be made public.

Bankruptcy claims trade in an over-the-counter market made up of small brokers who specialize in finding claims and traders from broker-dealers such as the Seaport Group, CRT Special Investments LLC and Macquarie Group. They call and send emails to potential buyers about the price and size of claims being bought and sold, meaning there are no official price quotes.

Buyers of Madoff claims have included Deutsche Bank and hedge funds Fortress Group, Monarch Capital and Silver Point Capital, according to traders involved in the transactions. Fortress did not respond for comment, while Deutsche, Monarch and Silver Point declined to comment.

PICARD'S EFFORTS

Picard's efforts to recover funds have included lawsuits against an array of banks, wealthy individuals and Madoff family members.

The defendants, who include Madoff's brother, Peter, and son Andrew, have countered that they, too, were betrayed by Madoff and that the trustee waited too long to bring some of his claims. Picard expanded his lawsuit, filed in U.S. Bankruptcy Court in Manhattan, against the family members earlier this month to $255 million, from $226 million.

In one of his earliest and biggest successes, Picard won approval in January 2011 of a $7.2 billion settlement with Madoff investor Jeffry Picower. Optimism among traders grew that the payback for claims holders would be large, and Madoff claims at that point traded above 70 cents on the dollar, according to traders who have tracked the prices.

"People thought he was going to roll through this," Joseph Sarachek, managing director at CRT, said of Picard.

Then, in September 2011, the trustee sustained some big setbacks, triggering a drop in claims prices to the mid-50-cents-on-the-dollar range, according to traders. U.S. District Court Judge Jed Rakoff in New York ruled that Picard could only reach back to the last two years of the fraud in pursuing his "clawback" lawsuits against Madoff customers who withdrew more money from their accounts than they had deposited.

The judge was considering whether Picard could seek funds from New York Mets owners Fred Wilpon and Saul Katz, who were investors with Madoff, and the ruling limited the trustee's potential recoveries. The Mets owners later settled litigation brought by the trustee.

In November, another federal judge in Manhattan threw out most of the trustee's nearly $20 billion lawsuit against JPMorgan Chase & Co (>> JPMorgan Chase & Co.) and a $2 billion case against UBS AG (>> UBS AG).

Trading in Madoff claims can be thin, and prices have bounced around sharply, according to market participants. Fishman, the Madoff victim who sold a claim in December, said he executed his trade when prices climbed from earlier levels. Since then, prices have settled to around 60 cents on the dollar, said Robert Gallivan, a senior managing director at Macquarie.

But none of these price movements or legal developments matter much anymore to Madoff investors who have shed their claims. Selling the claims has given some victims, who had entrusted their life savings to the man they thought was a financial genius, a measure of closure.

"I think people understand as time goes on that this is not a fast process," said Burt Ross, a Madoff victim in Malibu, California, who said he sold his claims some time ago.

(Reporting By Caroline Humer in New York and Sue Zeidler in Los Angeles; Editing by Martha Graybow, Amy Stevens and Leslie Adler)

By Caroline Humer and Sue Zeidler

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