Untangling Bernie Madoff's 'epic' Ponzi scheme continues despite his death in April

Court-appointed trustees have already recovered $14.5bn out of $17.5 bn in lost principal but ongoing litigation could potentially pull in billions of dollars more

Disgraced financier Bernard Madoff, centre, leaves the US District Court in Manhattan escorted by US Marshals after a bail hearing in New York on January 5, 2009. AP

A New York Mets baseball jacket, personalised for Bernard Madoff, is displayed during an auction preview of his seized items, in New York on November 13, 2009. The epic Ponzi scheme mastermind is dead, but the effort to untangle his web of deceit lives on. AP

Securities Investor Protection Act Trustee Irving Picard, left, is joined by US Attorney for the Southern District of New York Preet Bharara during a news conference,in New York, on December 17, 2010. AP

Gordon Bennett and his wife Kate Carolan sit outside their home in Inverness, California. The couple, who were victims of Bernard Madoff and forced to sell their home, now rent it back from someone they know who purchased it. AP

Richard Shapiro at his home in Hidden Hills, California. Mr Shapiro was one of the victims of the Bernard Madoff Ponzi scheme. When the scam was revealed in 2008, Mr Shapiro had retired, but went back to work and managed to save his home. His marriage ended about two years later and he believes the stress over the Madoff debacle contributed to its end. AP

From centre left, John Starr, chairman of the Joint Pension Board, first selectman Ken Flatto and Paul H. Hiller, chief fiscal officer, meet with other town representatives in December 2008 to discuss the fallout of money for the Town of Fairfield's pension fund, of which nearly 15 per cent of the fund's total value was entrusted to Bernard Madoff. AP

Reenie Harris of Cedar Knolls, New Jersey, admires a large framed antique print during a public viewing of items to be auctioned from the home of former Bernard Madoff finance chief Frank DiPascali in June 2010. The U.S. Marshals Service in New Jersey auctioned 51 lots of items that belonged to DiPascali, one of Madoff's closest associates. AP

Bernard Madoff exits a Manhattan federal court on March 10, 2009, in New York. AP

Epic Ponzi scheme mastermind Bernard Madoff is dead. But the effort to untangle his web of deceit lives on.

More than 12 years after Madoff confessed to running one of the biggest financial frauds in Wall Street history, a team of lawyers is still at work on a sprawling effort to recover money for the thousands of victims of his scam.

Their labours, which have already secured $14.5 billion of the estimated $17.5bn investors put into Madoff’s sham investment business, didn’t cease with the financier’s death in prison in April.

Ongoing litigation by Irving Picard, a court-appointed trustee for the liquidation of Bernard L. Madoff Investment Securities, and his chief counsel, David Sheehan, could potentially pull in billions of dollars more.

“You don’t like to see anyone die. But in this case, it wasn’t going to have any impact on what we’re doing,” Mr Picard says. “Our work goes on.”

The painstaking process of trying to unwind Madoff’s fraud began not long after the money manager’s arrest in December 2008.

His downfall came as a result of a national financial crisis, which became global, in which banks that had made reckless bets on mortgage-backed securities collapsed and investors scrambled to pull money out of the stock market.

Spooked investors started making withdrawals from Madoff’s investment fund, too, but he ran out of money to give them. While his books said his fund was worth $60bn, most of that money didn’t exist. He’d never actually invested the cash clients gave him.

When clients cashed out fictitious profits, Madoff simply stole from other clients to cover withdrawals.

Mr Picard was given the task of separating the “net losers” – Madoff clients who didn’t cash out of their accounts – from those who did.

Over time, net losers with approved claims have quietly seen an average of 70 per cent of their investments returned. Net winners were subjected to so-called “clawbacks”. Not only did they lose money they thought they had in their accounts, they had to pay back profits they had withdrawn over the years.

“Those people felt as though, and rightfully so, that they had been damaged twice – first by Madoff and then by this trustee saying ‘give me your profit’,” Mr Sheehan says.

The process was difficult for everyone. Some Madoff investors had retired early. Some had bought nice homes in expensive locales. Some had made large charitable donations, confident their nest egg was secure.

Gordon Bennett, thinking his account with Madoff was worth $3 million, did heavy renovations on a home in Marin County, north of San Francisco.

When he learned Madoff was arrested, he told his wife: “Kate, we just lost the house.”

The financial shock worsened months later when he learned that 25 years of annual withdrawals of up to 10 per cent meant he’d taken out more than he’d put in.

Mr Picard’s collectors wanted his profits. Suddenly, Mr Bennett was in danger of being added to the bucket of wealthy individuals and institutions the trustee was suing, claiming they knew or should have known their returns were fraudulent.

“That was quite scary,” he says. “We eventually worked out an arrangement with the trustee and we sent him all our documents and said: ‘Look, you know, we don’t have any money.’ So he eventually said: ‘OK, I’ll go after bigger fish’.”

And Mr Picard did, with some help from federal prosecutors. The biggest single chunk came in late 2010 when the widow of a Florida philanthropist agreed to return a staggering $7.2bn that her husband, businessman Jeffry Picower, had pocketed. Months later, another $1bn was secured from one of the many feeder funds that the trustee accused of ignoring red flags about Madoff.

These days, Mr Bennett, 74, finds solace in the same home after a friend bought it and rented it back to him.

“So we don’t have $3m now, but you know what, we don’t need $3m,” he says.

Some victims say that the news that Madoff had died at age 83 while serving a 150-year prison term served only as a sad reminder of crimes that altered their lives.

Richard Shapiro, 68, of Hidden Hills, California, said he lost a “very significant” amount of his net worth. In a panic, he briefly put his house up for sale and un-retired to earn money again as a commercial real estate development manager.

Mr Picard’s quick success at recovering some money spawned a mini-industry of firms offering Madoff victims immediate cash in return for their rights to whatever the trustee recovered.

Mr Shapiro pounced on that opportunity, selling one of his Madoff funds for much less than it was worth, and another for closer to what Mr Picard might eventually fetch, enabling him to save his home and start rebuilding his life.

“I do have my life back together now,” he says. “And I’m [not] sure that’s the case with every Madoff victim. I don’t think anybody walked away from it unscathed.”

You don't get something for nothing. Basically, if it's too good to be true, it is

Another victim who lost money, 59-year-old Charles Gevirtz, recalls feeling the payout formula was a raw deal.

“I was kind of angry at the trustee,” Mr Gervitz, an engineer from Detroit, says. “He didn’t even try to come up with a more reasonable settlement.”

Still, Mr Gervitz found a larger lesson to the pain. “You don’t get something for nothing. Basically, if it’s too good to be true, it is.”

Mr Picard and Mr Sheehan carry their own memories of the Madoff saga. Mr Sheehan recalls how there was one person who didn’t offer any help over the years: a delusional Madoff.

“He actually would complain to me that the people who got the false profits were making money, so why were they complaining? He was doing them a favour,” Mr Sheehan says in describing his interactions with the disgraced financier, including prison visits. “It was stolen money. It wasn’t much of a favour.”

Then there was the artwork recovered from Madoff's office and sold at auction, including an infamous four-foot sculpture depicting a screw – titled The Soft Screw – and bull lithographs by Roy Lichtenstein. All brought in more cash through auctions.

“There were lots of assets we could sell that you wouldn’t find in the typical case,” Mr Picard says. “Here, they had other people’s money to spend and they did.”

Asked whether the recovery effort was winding down, the lawyers expect it will go on for at least another two to three years – something they’ve been saying for a decade.

The trustee still has the financial backing of the non-profit Securities Investor Protection Corporation (SIPC) to keep global litigation going against the remaining clawback holdouts – including feeder funds and other sophisticated money managers who failed to detect the fraud.

But Mr Picard says: “Someday it will come to an end.”