Madoff trustee, liquidator dispute holds up payouts
* Kingate liquidator makes offer to BLMIS
* Investors want distribution of recovered fees
* Zolfo Cooper says claims process may be lengthy, costly
ZURICH, Nov 2 (Reuters) - A dispute between Madoff trustee Irvin Picard and Zolfo Cooper, liquidator of the Kingate feeder funds, is delaying payouts to Madoff investors and could result in lengthy court battles in the Caribbean.
It is just one of several knotty legal issues preventing Madoff investors from receiving money that has been recovered so far from the Madoff funds and the other funds that had invested in them.
Court-appointed Picard, from law firm Baker McKenzie, said last week he had approved payments of $534 million to victims of Madoff's $65 billion fraud, less than an eighth of the $4.44 billion in claims that so far he has deemed valid. [ID:nN28308821]
Documents seen by Reuters show that Picard, who represents Bernard L Madoff Investment Securities (BLMIS), had claimed about $870 million from the two Kingate funds, including more than $600 million Madoff's company paid in commissions to Kingate in the six years to December 2008.
Zolfo Cooper is asking Kingate shareholders to approve a deal in which the liquidator would pay the trustee 50 percent of Kingate's current assets -- namely the cash being held by the funds at Bank of Bermuda, their custodian bank -- after paying its own costs.
The liquidators are paid for their services from the assets recovered in a liquidation. The trustee is paid by the Securities Investors Protection Corporation, the U.S. body covering brokerage failures, although his payment can increase depending on the amount recovered.
Under the agreement, the funds would also pay 50 percent of any additional recoveries to BLMIS, and the investors would be allowed full claims in the liquidation of BMLIS.
Some investors are unhappy with the deal and want any recovered management and performance fees that were paid to Kingate to be distributed to them, said one lawyer, who asked not to be named because he is acting for investors.
LITIGATION RISKS
Zolfo Cooper has sent a letter to Kingate investors advising them to approve the settlement or risk lengthy litigation that could cost up to $10 million.
It said that if Picard was to go ahead with the claims process, he could ask the courts in the British Virgin Islands, where the Kingate funds were based, and in Bermuda, where asset manager Kingate Management Ltd was based, to give him control of any funds recovered there.
Zolfo Cooper said that fighting these requests in the courts could be time-consuming and costly, which would restrict its financial flexibility.
"A settlement with the trustee gives certainty to the amount which the fund pays to the trustee from the current assets whilst also providing a mechanism for releases between the trustee and investors," it said in the letter.
Both Zolfo Cooper and Picard, who is involved in lawsuits with the liquidators of several other feeder funds in the United States and elsewhere, declined to comment.
Another issue Zolfo Cooper has to deal with is the claims from "December subscribers", so called because they subscribed to invest in the Kingate funds from December 2008.
Their money, about $12 million in the case of the Kingate Global fund, was never invested. Investors say it could have been repaid fully since it was still in the Bank of Bermuda, which is now owned by HSBC (HSBA.L), when Madoff collapsed.
In late August, the Supreme Court of Bermuda ordered Kingate Global to repay sums of $6 million and $3 million to Knightsbridge (USD) Fund Limited and Standard Chartered Bank (STAN.L), respectively.
The ruling would have paved the way for the return of other December subscribers' investments, but the liquidator has appealed the decision. (Editing by Karen Foster)
