How Seth Klarman (Baupost) Scored a Big Win from the Bernie Madoff Mess
In the summer of 2010, James Mooney, a partner at Baupost Group, the massive $24 billion Boston hedge fund run by investment legend Seth Klarman, sensed there was money to be made acquiring customer claims of Bernard Madoff’s bogus investment firm. Mooney believed the Madoff claims represented a classic distressed debt situation, where “sophisticated participants in the market” who were “aided by their advisors, such as legal counsel,” could better understand the complex dynamics at play, according to a court-filed declaration Mooney made last year.
In particular, Mooney thought it was possible that Irving Picard, the court-appointed trustee of Madoff’s investment firm, could reach a favorable settlement with Barbara Picower, whose late husband, Jeffry, had extracted $7.2 billion from Madoff’s Ponzi scheme before it collapsed. Mooney also felt it was very possible that the trustee’s net equity process of reimbursing Madoff’s Ponzi scheme victims would survive court challenges. All Baupost needed was to find someone willing to trade their Madoff claim at the right price.
Baupost found that trading partner in the British Virgin Islands and now the hedge fund is currently sitting on a fat estimated return of 116%–although it still needs to finish getting through a long legal fight over the trade.As it happened, Kenneth Krys, the British Virgin Islands-based co-liquidator of the biggest Madoff feeder fund, Fairfield Sentry, had a Bernard L. Madoff Investment Securities claim with a face value of $230 million that in 2010 he wanted to sell. Operating through a Delaware affiliate called Farnum Place, Baupost started negotiating with Krys, submitting a bid to pay 32.125%, or $74 million, for the $230 million claim. Krys accepted Farnum Place’s offer, believing it “was in the best interest of the estate of Sentry,” court documents show, and signed off on the trade in early December 2010.
Three days later, Picard, the Madoff firm’s trustee, announced that he had cut a $7.2 billion deal with Barbara Picower, which called for $5 billion to be paid to the trustee. As a result, Picard had dramatically increased the amount of money he would have available to pay back victims of Madoff’s fraud—those who invested directly in the Madoff firm and took out less than they put in—to $8.7 billion.
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