Securities Law Blog

The concerns of Madoff investors, many of whom are still coming to grips with devastating losses, are turning from “what have I lost” to “how do I keep what I have”. As I have written before in this space, Irving Picard, the Madoff Trustee, is evaluating his rights to “clawback” any money paid out to Madoff investors over the last few years. The most recent Madoff clawback related developments are the subject of an article today on Bloomberg.com, which is repeated below. I would also suggest that, if you are a Madoff investor possibly subject to clawback, that it may be worthwhile lobbying your US senator and congressperson now. There have been whispers of a movement afoot in Washington to prevent the clawback. How that happens, I don’t know. What I do know is that a clawback is a clawback—and the trustee can’t be selective about it. That is good for individual investors. It means that Mr. Picard would have to clawback money from many charities as well as individuals—and the powers in DC may have little appetite for letting that happen.

Madoff Investors Seek Exemption From July Claim Deadline

By Christopher Scinta

Feb. 11 (Bloomberg) -- Investors who may have to return cash withdrawn from Bernard L. Madoff Investment Securities LLC before it failed said they should be exempted by the bankrupt firm’s trustee from a July claim deadline.

Investors may have a claim against the Madoff firm if they are forced to return the funds, some customers said in a filing yesterday in U.S. Bankruptcy Court in Manhattan.

The Lucerne Foundation, Collingwood Enterprises and Douglas Rimsky want the deadline pushed back, according to court papers. While investors who withdrew money before Madoff Securities collapsed in December don’t have claims now, they could be entitled to a claim should Irving Picard, the trustee, sue them for the withdrawn funds. The trustee can seek a so-called clawback if he believes there was a preferential payment or fraudulent transfer.

“While we filed this motion on behalf of three of our clients that need this relief, we recognize that this is an issue of importance to hundreds, if not thousands of investors,” plaintiffs’ attorney Philip Bentley said in a phone interview. “We hope the court will enter an order that will resolve the dilemma facing a large number of Madoff investors.”

Since Picard hasn’t told investors how clawback claims would be handled, people who withdrew money before the firm imploded may be compelled to file documents before the July 2 deadline to preserve their claim. If they do, they may lose the right to a jury trial if Picard sues seeking return of the money.

Rimsky, reached at Lucerne Textiles Inc., declined to comment. Bentley declined to provide specifics about his clients’ investments. A hearing is scheduled for Feb. 24 before U.S. Bankruptcy Judge Burton Lifland.

$950 Million
Picard said Feb. 4 he has recovered about $946.4 million in cash and securities for customers of the bankrupt New York company, allegedly at the center of a $50 billion Ponzi scheme. Picard, appointed as part of the Securities Investor Protection Corp.’s supervision of the advisory firm, declined to comment.

Bernard Madoff was arrested by FBI agents in December and charged with securities fraud. Madoff, 70, hasn’t formally responded to the criminal charge, though on Feb. 9 he partially settled a parallel suit by the U.S. Securities and Exchange Commission. He said he wouldn’t challenge the SEC allegations when the judge in that case determines the penalty. Madoff didn’t admit or deny any wrongdoing in the settlement.

Creditors of his firm may file claims until July 2, though customers should submit their forms before March 4 to be paid “out of customer property,” according to Picard’s Web site.

On Feb. 5, Picard filed with the court a 162-page list of Madoff “customers” for the year before his Dec. 11 arrest after sending out claim forms to 8,000 customers in January. Legal experts estimate it may take several years for Picard to pay all the customers of the accused fraudster.

The SIPC case is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC, 08-01789, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Christopher Scinta in New York bankruptcy court at scinta@bloomberg.net.

Do you remember the scene in the old Bugs Bunny cartoon when Elmer Fudd says “It’s Rabbit Season”? Well, I feel like that now….only it’s Ponzi season. The SEC, still reeling from the Congressional and Press body blows it has suffered since the massive Madoff investment fraud came to light in December, has declared war on Ponzi schemers.

In the “old days” (pre-Bernie), each of these cases would have been headline grabbers in their own right. Now, with the $50 billion fraud of Madoff still occupying the headlines every day—these mini-Ponzi deals have been largely ignored.

In late January, at a suburban New York train station, Nicholas Cosmo surrendered to federal authorities in connection with a suspected $380 million Ponzi scheme. Over 1,500 people had given him money in exchange for promised returns of 48-80% a year. George Theodule promised parishioners in his Florida church that he could double their money in 90 days. His take: allegedly $23 million, from Haitian immigrants of modest means. Investors in Idaho say they lost $100 million in a scheme that promised 25 to 40% annual returns. In Philadelphia, a former computer salesman allegedly scammed folks out of $50 million. An Atlanta fraudster was shut down in January after losing $25 million. And in the situation perhaps most Madoff-like, Arthur Nadel, a prominent money manager and philanthropist in Naples, Florida has been charged in a $300 million Ponzi scheme.

Don’t get me wrong—I am overjoyed that a reinvigorated SEC has started clamping down on Ponzi schemes in the weeks since the Madoff events first came to light. Securities fraudsters need to be stopped. What bothers me is the question that it begs---what took so long? Or, asked another way, what would have happened if this rigorous enforcement had been happening all along? How many people would have been saved the heartbreak of losing their life savings?