- The Washington Times - Wednesday, December 24, 2008

NEW YORK | Like some of Bernard Madoff’s clients, a Florida restaurant owner was lucky enough to withdraw part of his investment before the money manager allegedly confessed to a $50 billion Ponzi scheme. Now he’s worried he might be asked to give it back.

The 53-year-old investor, who asked not to be identified to protect his stake, took about $600,000 from his $1.5 million account this year, using some of it to pay down a mortgage. And Madoff clients who withdrew funds as long as six years ago may be sued on behalf of other alleged victims who are seeking the return of profits and even principal, securities and bankruptcy lawyers say.

“Right now there are Madoff winners and Madoff losers,” said Lynn LoPucki, who teaches bankruptcy law at Harvard University. “Before this is over there will be nothing but Madoff losers.”

Before his arrest on Dec. 11, Mr. Madoff, 70, confessed to employees that his “giant Ponzi scheme” may have cost as much as $50 billion, according to an FBI complaint. His misconduct may have stretched back to at least the 1970s, two people familiar with the government’s inquiry of Mr. Madoff said last week.

The Florida investor, who first gave his money to Mr. Madoff five years ago, said he had no hint of fraud and would go to jail rather than give up the amount he took out.

Irving Picard, the trustee appointed to liquidate Mr. Madoff’s brokerage, Bernard L. Madoff Investment Securities LLC, holds the fate of the restaurant owner and other investors in his hands. He said in a court filing Monday that “there has not been any showing or determination that there are sufficient funds” to satisfy victim claims. He didn’t return a call seeking comment on plans to sue victims to recover funds.

A so-called clawback of paid-out funds in the liquidation could result in lawsuits against investors such as charities, hedge funds and individuals who redeemed profits and took out principal.

“Charities are looking at their legal options as regarding their right to recoup money,” said Mark Charendoff, president of the New York-based Jewish Funders Network, whose 1,000 members fund Jewish causes and are assessing losses from Madoff investments. “I don’t know that they’ve been focused on or are aware that they may in fact be at further risk of loss.”

Bankruptcy laws authorize a trustee like Mr. Picard to recover money that was distributed as part of a fraud and share it among the victims, Ms. LoPucki said.

“The purpose of these laws is to balance the losses among the various investors, but how that balance is supposed to be struck is not clear,” Ms. LoPucki said.

Under New York state law, which can be invoked for Madoff recoveries, a trustee can seek redemptions going back six years, said Tracy Klestadt, a New York bankruptcy lawyer.

In a similar case, U.S. Bankruptcy Judge Adlai Hardin, in White Plains, N.Y., ordered investors of defunct hedge-fund manager Bayou Group LLC in October to disgorge profits they’d taken out. Investors were required to pay back any gains they’d redeemed involving “fictitious profits.” Before the fraud was discovered, Bayou paid out more than $135 million, according to court papers.

Judge Hardin also ruled that some investors would have to hand back their principal. Only investors who acted in “good faith” - a legal standard that makes investors prove they didn’t have knowledge or suspicion of fraud - could protect their initial stake, Judge Hardin ruled. He said investors could show they had good faith if they didn’t see any “red flags” when they withdrew the funds.

Copyright © 2019 The Washington Times, LLC. Click here for reprint permission.

The Washington Times Comment Policy

The Washington Times welcomes your comments on Spot.im, our third-party provider. Please read our Comment Policy before commenting.


Click to Read More and View Comments

Click to Hide