Below is an exclusive CNBC transcript of Madoff bankruptcy trustee Irving Picard and Chief Counsel David Sheehan who sat down with CNBC's Scott Cohn.
SCOTT COHN: All right. Let's start out with this milestone that we've reached today. Tell me about the distribution that you're announcing and where we stand.
IRVING PICARD: Well, we're announcing a distribution of a little over $500 million. It's as a result, primarily, of- settlement funds that we received- late last week of about- over a billion dollars from the Tremont settlement. And- that distribution will be- the $500 million distribution will be about $0.047.
SCOTT COHN: And- so, you know, we're- you- you've accomplished something that I think few thought possible, probably including yourselves going into this four years ago. More than half of the money has been recovered. A great deal of it is being distributed. Why do you think we've gotten to this point? How is it- how is it that it's gone so much better than so many people expected at the outset?
David Sheehan: I think it really emanates from the team that- the trustees put together, the people that work on it day in and day out. When we first got into the case, it was a blank slate. You knew there was this massive fraud, $64 billion was originally announced. And what were able to do- basically, was put that case together and build it in such a credible fashion over a period of time that you had results such as Picower, which was a definite game changer, adding $5 billion to the bottom line and just changed the whole dynamic. But the reason for that was- that we didn't get that money just because they could sign a check. It's because we were very credible in terms of our allegations, the research that we've done, et cetera. And I think that has contributed greatly to the outcome that we've achieved, that we are, indeed, as I say, very credible to all the defendants in this case.
SCOTT COHN: Four years in- I mean, going into it for years ago, you had to make heads or tails out of this massive global fraud. Do you have a sense now of how it was structured? Do you have a good idea of kind of where the money is- where it was flowing? What's your handle on it now, four years in?
IRVING PICARD: I think we have- we have a handle on where the money flowed. But we're still finding- that there are areas that we're- as we're continuing discovery and doing things in the litigation- that there are a lot of areas that we are still finding. And every day brings something new.
SCOTT COHN: What kinds of- oh, go ahead.
David Sheehan: I was going to add just this, and I think it's fascinating about the case. The case broke and everyone saw it as an affinity fraud. And it's true: Madoff preyed upon his friends, his family, his relatives, and members of the Jewish community. But what we found, by virtue of all of our research and the case that we've built, is that what he really became was part of the financial fabric of the international financial markets. If you look at what he was doing at the end, he was actually funding structured products that were being sold by major financial institutions such as J.P. Morgan Chase and others like that. So, in a real sense, here's a fraud- fraudster if you will, in the classic, traditional sense of the term. But over time and through his skill and his work, had become part, as- as I say, of the financial community. He was part of it. So that when it collapsed, even though he looks like an outlier, he's not really a Lehman, he's really not one of those, he was. He was, to a larger extent, a victim- you know, in the f- way a fraudster becomes a victim, of being found out. Because he fell as Lehman fell and all the others fell because he was actually part and parcel of that as well.
SCOTT COHN: So, he was sort of a conduit, right? I mean, he was a way for the f- the financial players around the world to move money around- and make it look legitimate.
David Sheehan: I agree with that. I think a good of that is true. As a matter of fact, the feeder funds, almost all of them were incorporated offshore. Many, many of them had- investors that were not in the United States, investors throughout Europe and the Caribbean who were investing, and South America. And all of them were investing in these funds which then, of course, turned and invested in Madoff. Even though they purported to be investing in other vehicles, m- Madoff was ultimately where the money went.
SCOTT COHN: What more do we know about Bernie Madoff himself now, beyond that he was a conduit? I mean, the original thought was that this was a guy who was running this Ponzi scheme for many, many years. Presumably in a Ponzi scheme, he's siphoning off money for himself, living a lavish lifestyle, the customers get ripped off in the end. But it sounds like what you're saying is number one, it's more complicated than that; and also, when you look at Bernie Madoff's lifestyle as compared to other super-rich people, he didn't live that ostentatious of a lifestyle. Was he stealing money- siphoning money off for himself?
IRVING PICARD: Oh, yes. He w- he was doing that. But he was sort of living just below the radar screen, if you will. He had houses in Palm Beach, out in the Hamptons. He had a place in France. He had- several yachts. So, he was- and he had an interest in an airplane. So, he- yes, he did live- he had a good lifestyle. But- he wasn't living, as you suggested, like the super-rich.
David Sheehan: You know, the interesting thing is, is that we know, because we've interviewed Mr. Madoff and the work that we've done in this case, that he really wasn't happy about the structured products I mentioned earlier. Why? Because there was a chance that his fraud would be exposed by virtue of third parties investing, such as banks and others, into him. But he was such a good return. You know, you have to think back pre-2008. A return such as he was giving year in, year out, guaranteed was just too attractive to those institutions to just ignore it. So, even though he wasn't happy about them getting there and that ultimately he was afraid he would be exposed- he couldn't stop that from happening.
SCOTT COHN: There was a lot of speculation at the outset, and I think you've both talked about this before, about whether Madoff has money hidden away somewhere, whether he still does. Have you- have you followed that path? Do you think he has money hidden away? Or did he, in fact, turn over what he had?
David Sheehan: My sense of it is that we found everything that there is to be had from Mr. Madoff and his family. In other words- you- if you read our lawsuits, we allege- you know, various loans, various transactions, trading in the accounts of themselves. All of those things were there, we found them, et cetera. We have not found any trickle of money, or flow of money, for that matter, into other areas where they took money and created it for later- a rainy day, so to speak. That did not happen.
SCOTT COHN: So, you've talked to him personally. You've dealt with him. Your people have dealt with him, even while he's still in prison. Tell me the extent of that. Is he being helpful? He said at the outset he was going to help his clients at least get their principle back. Of course, he didn't name names, but- how helpful has he been or not-
IRVING PICARD: He-
SCOTT COHN: -helpful?
IRVING PICARD: -he- in my view, he has not been helpful. We- when-the interviews of him were, really, to confirm the information we found because- those interviews took place shortly before some of our litigations began and- we put this case together- the litigation teams and- really, from a blank slate.
SCOTT COHN: How frequently are you in contact with him?
David Sheehan: Well, we went- in August of 2010, just before we filed all the litigation, and spent several days with him on two separate occasions with the idea of confirming whether or not all those allegations that we were putting together- sort of held together. 'Cause we had no one to Bounce 'em off of. Recognize, of course, we're dealing with someone who's not to be trusted. But at the same time, we had enough facts to start asking him questions, et cetera. Since then, we really have not been in contact with him since- only because there's no real purpose to be served in that.
SCOTT COHN: Has he offered any help since then?
David Sheehan: Several times.
SCOTT COHN: What type of-
David Sheehan: Well, he- there's always the suggestion that there's more that he could help us with. But when we pressed his counsel to give us an example of that before we start getting on an airplane and fly down to see him, w- we never get anything that's worthwhile. So, we have not taken him up on those offers.
SCOTT COHN: So, do you think that he does, indeed, have remorse for what he did? Or is it remorse with conditions? I mean, what's been your experience?
IRVING PICARD: I'd say remorse with conditions.
SCOTT COHN: Explain that.
IRVING PICARD: Well, he- I think he thinks that he's still in control of the situation, so that if you're going to come and interview him he could fix the ground rules. And- that's not the situation. He also- reading the press items or the e-mails and things that he's been writing to reporters- it really doesn't suggest to me that he's remorseful.
SCOTT COHN: So, if you wanted to get some information out him, if you- if you felt that there was anything to be gained by going to Butner or even to- if you had a question to ask him at this point, four years in, what would it be?
David Sheehan: I don't know that I actually do have a question to ask him- interestingly enough. I think we've explored this case to- fairly well, to the point where I think we know the case very, very well. There's not really anything I'd like him to confirm. The- there are certain trails that, you know, end and we can't pursue them any longer. But none of them seem to- have any real great value. So, I don't know that we would want to. I think that he- I agree with- Irving. I do believe that he has- not a sense of remorse. I don't even know if I'd put conditions on it. I don't know that he has a sense of right or wrong. That- that was certainly the case when we were interviewing him. We were asking him about the so-called dark pools of liquidity that are talked about in the financial circles, and that he supposedly used in Europe. And he really got into it and started talking to us like he was a salesman. And I said to him, "Mr. Madoff, you know, you know that didn't happen." And he said, "Yes, but it could've." So, he actually really does believe in what he was selling.
SCOTT COHN: Yeah. But a different kind of fraudster than we all thought going in. Correct?
David Sheehan: Oh, I-
David Sheehan:-I agree. Yes. Absolutely.
SCOTT COHN: So, what is the difference from what you thought going in when you first picked up this case in the end of 2008 to where we are now? What have you learned about Bernie Madoff?
David Sheehan: Well, as I said earlier, I think what we really s- you know, when you first come in, you know, and- your first reaction to this, as I said, it's an affinity fraud. That was the word that was Out There and that he had taken advantage of all these people. And he had. There was no question about that. But it was only when you started to reconstruct what was going on with the feeder funds. In- in the early '90s, '92 when the Avellino and Bienes- SEC investigation took place, that was all individuals. There was, like, 400 different people that were involved there. But after that, that's when the feeder funds and you got much larger and faster. As you start talking about billions and billions of dollars- to the point where you had $17 to $18 billion worth of assets under management. That's a major player. Not- just obviously in terms of dealing with the fraud- in the central level. He was dealing with it at a very sophisticated level, as I said involving other- and that's other industries. And as a result, you s- started to see him in a way that was totally different.
That he could manipulate those in a way that was fascinating. That he would be able to do that. That people who were investing $2 to $3 billion with him and they would ask to find out where he kept his securities, he would say no. And they would accept that as an answer. And- because, again, the returns were just so great. But he had the credibility to actually say that and make it stick.
SCOTT COHN: So there was a lot of- we know now, a lot of willful blindness among a lot of people. Do we think, at this point, that there were others who-and- if you can identify them, please do, who were directly involved? Who knew what he was doing, were not just complicit in it by turning a blind eye, but were helping him? How alone was he in carrying this out?
IRVING PICARD: Well, I don't think anybody could carry out- a fraud this large by himself or herself. And we know that there were 16 or 17 people who worked on the 17th floor at the Lipstick Building- who were intimately involved. Now, some were key-punch types and probably weren't aware of what they were doing. But we also know that there were a number of them who did know what they were doing. They've either pled guilty or they've been indicted and will g- be going to trial later in the year.
SCOTT COHN: What about members of the family? Are you convinced now that the- sons- I mean, he- Peter Madoff pleaded guilty, but did not plead guilty to knowledge of the fraud. Ruth Madoff, I mean, did they- how involved were they? Or was it this willful blindness?
IRVING PICARD: They certain should have been aware. Th- we've alleged in our complaints certain activities that should have led them to maybe ask questions or- but know that something wasn't right. Back dating of trades and things like that.
David Sheehan: Well, you know, Andrew and Mark- purportedly ran the proprietary trading operation. It was called market making, but at the end it was almost all proprietary trading by him. And therefore, they're in the market every day, you know, hundreds of securities, thousands being traded, et cetera. And, yet, Mr. Madoff is supposedly going in and out of the market two, three, four times a year, billions and billions of dollars, and there's no volatility, there's nothing occurring, they're not seeing any of that. Very, very difficult to imagine that someone could be that close to the situation- steps away, if you will, and that they have no idea what's occurring here, not happening. Even though they're partaking in it- as we've alleged in ... as- as Mr. Picard just said. We have, you know, allegations that are predicated upon the fact they did trades that were backdated. You know, how do you explain that? I mean, I'd love to have my broker be able to backdate my trades to when they would- guarantee a profit. Only Madoff was able to do that because there were no trades and he made that all up.
SCOTT COHN: And, yet, that- that raises an interesting point, though. There were backdated trades. We know that. You've documented that. And, yet, nobody seems to have been called to account for that. There was somebody who was making that trade, who was calling and asking to backdate the trade. Why has nobody been called to account, even criminally- f- for something like that? Because that's fraud.
David Sheehan: I can't speak to the criminal side of it. That's obviously a matter for the U.S. Attorney's office. But on the civil side- they have, in a sense, been called to account for it. Because we- the settlements that we had with Mr. Picower or the settlement we had with Mr. Shapiro- all those involved- both of those, I should say, involved backdated trading. And they didn't resolve themselves by way of a verdict in trial. They resolved themselves by virtue of a settlement because, as I said at the outset, these are very credible allegations backed up by documentation and thorough research. So, they could really refute that. So, they have been called to account civilly. They've paid damages. They've paid settlements to us. But beyond that- can't really comment.
IRVING PICARD: And we still have pending litigation with some of those issues.
SCOTT COHN: So, let's talk about some of that. Because we-you have- as we talked about at the outset- recovered a tremendous amount of money. But there are some big chunks that are out there. Where do you feel the biggest chunks are that are out there, some of this in litigation that's still pending?
David Sheehan: Well, the vast majority of it is in the feeder funds that I spoke of earlier that are located in the islands and- have, you know, investors throughout Europe. Hundreds of millions of dollars. The settlement that- that spawned the outcome that we're talking about here today, the $500 million distribution to customers that's going to take place shortly, came out of a settlement with a series of funds under Tremont. They were called the Rye Select Funds and a series of other funds. Those funds- are paying- paid over a billion dollars to the trustee in settlement. I think there are many other funds that will pay those kinds of dollars. I- that's why we're fairly confident that we think that we have a very good chance to achieve 100%- recovery here in terms of the dollars. Because the numbers that are Out There with regard to those funds are so substantial. And the cases we have are very, very strong. And on top of that there is, at this point, an economic incentive for them to settle with us as well, given the amount of money that we've collected and the fact that the claims themselves, as distressed debt, are selling at a very high rate.
IRVING PICARD: And just to add to that, we have claims that we haven't allowed as yet because the people got payments within 90 days. And there may be an incentive for them to pay back certain to those funds and then have their claims allowed. So, that's another area where we may have- some success in- in- the near future in- in collecting.
SCOTT COHN: One of the biggest pending cases, and I guess this probably gets to what you've been saying about big financial players using Madoff as sort of a conduit, is J. P. Morgan.
David Sheehan: Right.
SCOTT COHN: Which you suffered some setbacks with. You're appealing the dismissal of the- case, the vast - the majority of the case. What do you allege that J. P. Morgan did and do you think that maybe the way that you went about that case- in hindsight, was overreach?
David Sheehan: Well, certainly we were on the outer edges. Whether we were overreaching or not, obviously, ultimately the court will decide and the case is pending. What we were alleging there is, is that they had a relationship that went back a number of years, over a decade- several decades, actually. And what they had was an insight into the activities of Mr. Madoff on a daily basis, hundreds of millions of dollars going back and forth in a way that would've suggested that something was occurring that was not trading in the traditional sense of the term and that they had an obligation to look into that under the banking laws. Where we've run into a roadblock is, obviously, the in pari delicto defense, and that is, is that Mr. Picard, in effect, stands in the shoes of Mr. Madoff and BLMIS. And therefore, he, theoretically, is a wrongdoer. Just- is- so, that Mr. Madoff certainly couldn't sue, you know, a fellow wrongdoer. Well, Mr. Picard should not be. We think that's very outdated. I think it has no real relationship to reality and Mr. Picard is certainly not going to be one against the bank, turn that money over to Mr. Madoff in Butner. That's not happening. What we're going to be able to do is take that money and give it to the customers who were all victimized by virtue of the fact that this Ponzi scheme continued for years and years and years. Without the assistance of a major bank, that couldn't have happened. So, we feel as though there should be some relief there.
SCOTT COHN: So, J. P. Morgan the-
IRVING PICARD: I'd just like to add to that. I'm a fiduciary and it's my job to go and collect as much as possible for the people who've been victimized. And every time- money was paid out, it was being paid by other people's money. And, so, it- the- all the litigation is really an effort to level the playing field so that the people who haven't been paid in full have a chance of getting paid in full.
SCOTT COHN: And the allegation against J. P. Morgan, though, is- I mean, it's different from, you know, feeder funds that maybe should've known and turned a blind eye. This was- this was his primary bank. They were settling his trades. They had a window on the business day to day for years. How could they not have known?
David Sheehan: Well, you know, it's interesting you say that. Because if you look at the allegations, which you really don't get much of an examination because of the legal principles- that I mentioned earlier. They get focused upon because they resulted in the case being dismissed. The allegations suggest that there were people working at the bank that were well aware of the fact that he was highly suspect. As I said earlier, they did structured products. So, in order to do that, there- it wasn't just the people running the account. There were people who were structuring these investments who had to do an analysis of whether or not that was a safe investment, something that they could take their high-net-worth individuals and place them into. And we alleged this in the complaint and there are literally e-mails where one of the high-net-worth, you know, officers is saying to another, "I heard this is a Ponzi scheme." And the other officer is writing back and saying, "No, I Googled it. It's not." Well, in any sense of the term, that's not due diligence. Everyone knows that. But what it was is that- and they were not alone. The kind of e-mail traffic among people with funds in other banks is- we also have evidence of that as well. It's because the returns were just too good and he'd been around so long. So, even though there were all these red flags that people- such as J. P. Morgan-and others saw, they chose to- as you said earlier, they turned a blind eye to those because the returns were just too good and they'd been around. So, let's put our money in. We actually have an e-mail where one of them is saying, "Well, even if it's a fraud, we can lose up to $3 billion and it'll be okay." So, they were making a risk analysis, but not the kind that you and I would make.
SCOTT COHN: So, is it your contention that they did this, they, at the very least, turned a blind eye to it and may have facilitated it, and they're getting off on a legal technicality?