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.
53-year-old investor, who asked not to be identified to protect his stake, took out about $600,000 this year from his $1.5 million account, using some of it to pay down a mortgage. He and other Madoff clients who withdrew funds as long as six years ago may be sued on behalf of other victims to return 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.”
If folks are forced to give back profits and principal, won’t the IRS have to pay back their taxes on that money? Also, won”t many of those folks be forced to file banckruptcy?
I can understand the give back requirement only if the withdrawing person knew the investment was a Ponzi scheme when he placed his money into it.
#2, you can be required to return stolen property, even if you didn’t know it was stolen when you acquired it . . . .
The winners will be the lawyers.
I understand that some are suing the SEC for its failure.
#3, Exactly my point — if you did not know of the scheme when you placed your investment, and latter got your principle out, why would you have to return the principle? Certainly surrendering the interest gained could be seen as reasonable.
If you pay somebody $5,000 for a car, and then the car that he gives you turns out to be stolen, they take the car. And they don’t give you your $5,000 back. If the criminal still had the money, it would be tumbled in with all the other “proceeds” of the scheme, and then all those defrauded would bring suit, and a judge would determine equitable distribution. The person in question believed he was getting “his” principle our of the fund, but he was in fact receiving stolen goods–money taken, stolen, from other deluded “investors.” The amounts of this fraud are truly staggering, and apparently the net will reach back many years. It will be quite a task to figure out when the fund went bad, when the criminality began, and where all the money has gone. Then, as Ken notes above, everybody will be suing everybody else.
Bruce Robison
#6. Fr. Bruce, First, thank you for your excellent example. I see your point, and have always understood that a receiver of stolen goods must surrender them and is at the mercy of the thief for any return of money. I also agree with you that this is a hideous mess that will have no good end for those involved. The country would be far better off with a regulated structure for all investments.
Here is something else to consider. What happened in the early 1900’s in the original Ponzi case? Did any of those who withdrew from their accounts early have to surrender any money to the authorities beyond interest? That is, did they lose their principal? I do not know the answer, but will try to find out.
Also, here is a slight variation of your example: George has a friend Fred who says he is going to the classic car auction in Scottsdale and can get him a Buggati for $100,000. George gives Fred the $100,000, but later decides the Buggati will not be the best transportation for him. He gets a refund of $100,000 (sure, different money) from Fred. Later the authorities come to George and say ‘Fred was a fraud, he gave you somebody else’s $100,000. Now, you give us the $100,000.” George will say to them, “money is fungible, I only got back what I put in, I’m keeping the $100,000, its mine.”
What would you do? More importantly what would a court do? I would be inclined to leave the money with George.
Christmas Blessings to you, — Stan
“Clawback” is a basic feature of bankruptcy law, although it usually extends only to money received from the debtor during the 90 days before the bankruptcy filing. The basic idea is that the debtors’ creditors should be treated alike.
Take the case of Stinkerpot, Grabby, and Meeks. Stinkerpot owes $1 million to Grabby and $1 million to Meeks. Although nobody knows it, Stinkerpot is in financial trouble and plans to file for bankruptcy this Friday. He has $1.1 million in assets and $2 million in liabilities.
As things stand, Grabby and Meeks would each receive 55 cents per dollar owed: i.e., $550,000. But Stinkerpot likes Grabby and dislikes Meeks. So he pays Grabby $1 million today, has a merry Christmas, and files for bankruptcy.
Grabby and Meeks had the same kind of claim against Stinkerpot. Yet if the law let Grabby keep the full $1 million, Grabby would receive full payment and Meeks would receive only 10 cents per dollar. That law equalizes the two creditors’ treatment by requiring Grabby to pay the court $450,000, which in my simple example will go to Meeks. Grabby and Meeks will each end up with 55 cents for each dollar of their claims. That’s reasonable.
(Note, BTW, that the law treats Grabby differently than it would treat you if had sold Stinkerpot a car last week and been paid $20,000 for it. You would have provided new value, the car, whereas Grabby merely received payment on a preexisting debt.)
[i] If you pay somebody $5,000 for a car, and then the car that he gives you turns out to be stolen, they take the car. And they don’t give you your $5,000 back [/i]
Not necessarily. If you purchase stolen property in good faith (i.e., having no reason to believe the transaction is irregular), you are treated better than that. Because we have a title-registration system for cars, it may be hard to purchase in good faith. But the basic principle holds true: the law protects a purchaser who buys property for good money in good faith.
[i] Everybody will be suing everybody else [/i]
In the case of an ordinary bankruptcy, the various claims are handled at the same time, by the same court. A court-appointed trustee represents the unsecured creditors, so they can get what’s owed to them without having to hire their own lawyers.
#8. Irenaeus, I like your example of Stinkerpot, Grabby, and Meeks better than Fred the Fraud. Will “clawback” be in effect for a case like Fred’s in 7? There Fred did not, realizing he was about to go bankrupt, proffer the cash as a favor to George in bad faith to other creditors. George simply applied to have it returned and Fred complied. I am neither atty. nor CPA and have little to invest, so the interest here is somewhat academic. Thanks for your insight and Christmas Blessings, — Stan
Stan [#11]: In #8, Stinkerpot knew he was going broke and intended to treat Grabby more favorably than Meeks. But clawback does not depend on those facts. The key is that you as a creditor receive a preferential payment from the debtor within 90 days before the bankruptcy filing. A payment is preferential insofar as you (1) provide no new value (e.g., sell the debtor a car) and (2) end up with a higher proportion of the debtor’s assets than you would otherwise be entitled to.
A payment is not preferential (and thus is not subject to clawback) if the debtor both incurred the debt and made the payment in the ordinary course of business. I hope that would cover our friend George, who might otherwise get a very raw deal. But I’m not a bankruptcy lawyer and would welcome insight from those who are.
My basic point in #8 is that clawback, although counterintuitive, helps produce fairer, more sensible results than letting aggressive creditors get paid in full and other creditors get paid little or nothing.
12. Irenaeus, Many thanks for the clarifications. We’ll hope the best for George, unless he had insider knowledge that prompted his withdrawal. In that case, it would be only fair for his money to go into the pool that will be divided by all the creditors.