Following The Madoff Money

In a twist of mystery worthy of a certain tweedy detective hailing from Baker Street, here’s the case of the missing $2.5 billion.

As in: Someone, or a group of someones, is not stepping up to demand restitution from the Bernard Madoff scheme that bilked $20 billion from a wide ranging roster of investors. Bloomberg noted that the claims thus far amount to only $17.5 billion, which of course leaves the mystery $2.5 billion lingering … somewhere. The newswire said that in the wake of the scandal, propped up via classic Ponzi mechanism and then turning to dust eight years ago, the game has been afoot (there’s Sherlock Holmes again), with a rumor mill speculating that investors have included everyone from tax dodgers to con men to drug dealers – all of whom would have a vested interest not revealing themselves to the authorities via official claims.

But the truth, said Bloomberg, may be a bit more mundane.

Of that $2.5 billion thus unclaimed, said the newswire, roughly $1.2 billion is tied to two hedge funds based in the Caribbean, with at least some of the radio silence stemming from the possibility of a “calculated decision” made by those funds not to shed too much light on their operations. After all they may have to give back more than they recoup should they be exposed in the light of the United States legal system. Of the two funds, the bigger one is Harley International (Cayman) Ltd., which began investing with Madoff two decades ago. The fund invested roughly all of its money — more than $2 billion, according to Bloomberg — with Madoff, as noted in court filings. In the midst of the financial crisis, the hedge fund took out $1 billion and lost the other $1 billion through Madoff’s collapse – and then was liquidated seven years ago.

Trustees for the Madoff victims sued Harley that year in New York, stating that the fund should have known the purported Madoff returns were unrealistic.  Harley then had to face the Catch 22 of suing for the $1 billion it lost with Madoff, and at the same time risk being forced to pay up the $1 billion it had redeemed from Madoff while recovering only pennies on the dollar for what it had lost on the funds kept with the Ponzi master.

In an email provided to Bloomberg from Anthony Inder Rieden, CEO of Euro-Dutch, the company that managed Harley, via Euro-Dutch: “It shouldn’t be too difficult to figure out why Harley didn’t file a claim in the Madoff liquidation.”

And in an incremental “could have asked for money scenario” Bloomberg said there is another feeder fund, known as Vizcaya Partners, that could have filed for $147 million, yet has not done so. Based in the British Virgin Islands, the firm had been targeted by a trustee lawsuit that sought to claw back the $180 million the fund withdrew from Madoff before all was lost. There was a $25 million settlement in that case.

No real trails lead to the other more than $1 billion, said Bloomberg, with at least some rationale coming from the fact that the claims process only a few years ago had been promising only a few pennies on the dollar. But now, claims are getting quite near 60 cents on the dollar. Thousands of people are waiting in line to get some money back, and thus far recovery efforts have garnered a bit more than $9 billion through trustee efforts.