Ever since Bernie Madoff’s Ponzi scheme collapsed in 2008, it’s been much-rumored that investors included tax dodgers shielding money from the IRS, drug dealers who laundered proceeds through the con man and wealthy moguls hiding assets from ex-spouses.

After all, the scheme wiped out $20 billion of investors’ money, but the victims’ claims for repayment total just $17.5 billion.

Who would walk away from $2.5 billion, and why?

Part of the answer may be far less mysterious or dubious than thought.

Almost half of the unclaimed money can be traced to a couple of Caribbean-based hedge funds. Their reason, while unknown, may have amounted to a calculated decision that any recovery on their $1.2 billion of claims would be tiny compared with what they might be forced to give back if they got tangled up in U.S. courts, according to lawyers familiar with the recovery process.  As for the remaining $1.3 billion in unclaimed money, experts are left to ponder. Unlike the two funds, these are likely individual investors who had a variety of reasons to shy away from the claims process, especially at a time when victims were expecting to recover only 4 or 5 cents on the dollar, legal experts say.

"What’s the downside of putting a claim in and seeing what happens, unless somebody doesn’t want their own affairs being scrutinized?" said Richard Scheff, a former federal prosecutor who’s chairman of Philadelphia-based Montgomery McCracken Walker & Rhoads LLP. Some of these people may be kicking themselves now; victims are getting 57 cents on the dollar.

Feeder Funds

The situation underscores the complexities involved in the effort to recover money for Madoff’s victims. So far Irving Picard, the trustee hired to wind down Madoff’s firm, has repaid about $9.2 billion to people who invested directly with the scammer. Tens of thousands of others await some recovery. They couldn’t file claims with Picard because they placed money in so-called feeder funds that invested with Madoff.

"We can’t speculate on the motivations for any customer deciding not to attempt to recover lost principal via the claims process," said Amanda Remus, spokeswoman for Picard and his team of lawyers at BakerHostetler LLP in Manhattan. Picard is barred by law from revealing the names of victims.

The biggest of the two hedge funds that invested with Madoff is Harley International (Cayman) Ltd., managed by the obscure trust company Euro-Dutch Management Ltd. Harley opened an account with Madoff in 1996, around the time the con man began ramping up his fraud with the help of rigged computer programs, court records in New York show.