Some May Have To Pay Back Madoff "Profits"

Investors Who Withdrew Millions From Ponzi Scheme May Have To Return Their Gains

(AP)  The many Bernard Madoff investors who withdrew money from their accounts over the years are now wrestling with an ethical and legal quandary.

What they thought were profits was likely money stolen from other clients in what prosecutors are calling the largest Ponzi scheme in history. Now, they are confronting the possibility they may have to pay some of it back.

The issue came to the forefront this week as about 8,000 former Madoff clients began to receive letters inviting them to apply for up to $500,000 in aid from the Securities Investor Protection Corp.

Lawyers for investors have been warning clients to do some tough math before they apply for any funds set aside for the victims, and figure out whether they were a winner or loser in the scheme.

Hundreds and maybe thousands of investors in Madoff's funds have been withdrawing money from their accounts for many years. In many cases, those investors have withdrawn far more than their principal investment.

"I had a call yesterday from a guy who said, 'I've taken out more money then I originally put in, but I still had $1 million left with Madoff. Should I file a $1 million claim?'" said Steven Caruso, a New York attorney specializing in securities and investment fraud.

"I'm hard-pressed to give advice in that situation," Caruso said.

Among the options: Get in line with other victims looking for restitution. Keep quiet and hope nobody notices. Return the money. Or hire a lawyer and fight to keep profits that were probably fraudulent.

No one knows yet how many people will emerge as net winners in the scandal, but the numbers appear to be substantial. Many of Madoff's long-term investors have, over time, cashed out millions of dollars of their supposed profits, which routinely amounted to 11 percent to 15 percent per year.

Jonathan Levitt, a New Jersey attorney who represents several former Madoff clients, said more than half of the victims who called his office looking for help have turned out to be people whose long-term profits exceeded their principal investment.

"There are a lot of net winners," he said.

Asked for an example, Levitt said one caller (whom he declined to name) invested $1.8 million with Madoff more than a decade ago, then cashed out nearly $3 million worth of "profits" as the years went by.

On paper, he still had $4 million invested with Madoff when the scheme collapsed, but it now looks as if that figure was almost entirely comprised of fictitious profits on investments that were never actually made, leaving his claim to be owed anything unclear.

Other attorneys report getting similar calls.

Under federal law, the court-appointed trustee trying to unravel Madoff's business can demand that people who profited from the scheme return some or all of the money.

These so-called "clawbacks" are generally limited to payouts over the last six years, but could still amount to big bucks for some investors.

When a hedge fund run by the Bayou Group collapsed and was revealed to be a Ponzi scheme in 2005, the trustee handling the case sought court orders forcing investors to return false profits. Many experts anticipate a similar process in the Madoff case.

Applying for the aid could give the trustee evidence he needs to initiate a clawback claim. On the other hand, investors who ignore the letter would most likely forfeit any chance of recovering lost funds.

No matter how they respond, it may only be a matter of time before investors wiped out in the scandal turn on those who unknowingly enjoyed the fruits of the fraud.

"The sharks are all circling," Caruso said.

Some hedge funds that had billions of dollars invested with Madoff are already going through years worth of records, trying to figure out which of their investors withdrew more than they put in.

That data could be used by the fund managers to defend themselves against lawsuits, or go after clients deemed to have profited from the scheme and get them to return the cash.

The future is equally cloudy for investors who cashed out entirely before Madoff's arrest.

Their lucky ranks include the Fort Worth Employees Retirement Fund, which invested $7.5 million in a Madoff-related hedge fund years ago, then cashed out last summer after a consultant raised concerns about the investment.

The consultant, due diligence firm Albourne Partners, of London, had long been skeptical of Madoff's reported investment returns.

Fort Worth walked away with $10 million - a sum that included $2.5 million in what now appears to be fraudulent profit.

A lawyer for the public pension fund, Robert Klausner, said he couldn't discuss whether that money might have to be returned, but said the decision to divest was not made because of "special or inside knowledge of what was later reported to be misconduct."

"There just aren't any winners in this deal," Klausner said.

SIPC Chief Executive Stephen Harbeck told The Associated Press neither he nor the trustee handling Madoff's business, Irving Picard, have decided what to do about Madoff investors who made money. He predicted the process would be "a legal and accounting nightmare."

"Between money in and money out, versus statements received, it is a real difficult pile of issues," Harbeck said. "There are some customers who would want us to use clawback procedures against other customers, and there are other customers who would resist that."

Asked if SIPC would rule out paying claims to investors who appear to have net profits, Harbeck said it was "too early" to say.

He encouraged people to file claims, even if they think it might ultimately be denied, but said investors had no legal duty to do so.

[jmartinson5]

People who lost their money should not go after Madoff (there is likely nothing left anyway!) but they should go after the even bigger criminals, the people who advised them to invest with Madoff to begin with: most of which were paid handsome kickbacks.

This was a recent good read for me on this subject - it was called Hedge Fund Operational Due Diligence: Understandingthe Risks by Jason Scharfman published by Wiley Finance. Seemed to be real world advice on the type of due diligence people should be doing. Maybe some of these lawyers should read it before giving advice on due diligence.

People need to do their homework before giving blank checks away and then complaining about it!

[eggy1620]

Thus the US Government is complicit . . . Posted by kenhamlett

I suspect that we will find out that government officials were invested on the winning end, thus the incentive to just let it go for so long.

[kenhamlett]

All monies should be returned and pooled. They redistribute it according to the amount invested. The winners are likely the very people who suckered new investors into the scam. That is the way a pyramid works. In addition there is an appearance of money laundering so that adds to the confusion and a good potential for more people to be charged.
This whole thing is a sham since the SEC waited for a confession before bothering to act. They were prepared to ignore it forever. Thus the US Government is complicit.

[bobnjersey]

[In order to get into a hedge fund one must have a net worth of one million dollars and a certain level of income. Why bailout these shysters?]
[Posted by stevador39 at 02:26 PM : Jan 09, 2009]

there were likely many institutional investors with their money in his funds. there are many examples of an institutional investor ... but a few could be a state retirement fund, or a teachers union retirement fund, or a regional police organization retirement fund, or a charitable organization w/ it''s donated dollars in the fund.

which of these qualify as shysters?

[eggy1620]

Any investor who forfeits their fruadulent profits should be entitled to receive full refunds of the taxes they paid on those profits.

[stevador39]

Hedge funds are high risks investments equal to bets in Law Vegas. In order to get into a hedge fund one must have a net worth of one million dollars and a certain level of income. Why bailout these shysters?

[drinuk]

This massive scam is now paying for GENOCIDE in GAZA,

They have feathered their war chest before Obama tells them to F--- Off ! Follow the Money, Lehman Bros, Madoff, Etc, Etc The Zionists have stitched America up yet again.

[bobnjersey]

[Jonathan Levitt, a New Jersey attorney who represents several former Madoff clients, said more than half of the victims who called his office looking for help have turned out to be people whose long-term profits exceeded their principal investment. HOLY CRAPP!!!!!!!!!
These are some really greedy ***.]
[Posted by mnelsonix at 11:27 AM : Jan 09, 2009]

that''s the foundation of investing ... that you have a positive return. what makes them greedy in expecting that their investment would have a positive return?

they didn''t promote the scam ... they just unsuspectingly funded it under the guise of a legal investment.

these people/entities ''are'' victims ... because if there money wasn''t in madoff''s funds, they could have been in another fund ... a legitimate one ... that did give them positive returns that were legal.

[vcofreason]

The non-profits and charities destroyed by this are the real victims in this. Yes, I know that trickling all the way down from the top will be some people who knew all along or profited, but in the end, the rich will stay rich and the poor will get poorer. It never happens any other way.

[notopennshut]

Honor among thieves?? In any case, those who invested with him, reaped more than "bountiful harvests", which would seem absolutely impossible, even in the best of times, have a responsibility themselves. they have "gained" the ill-gotten gains, so why do they think that they are the victims now? If my investments made a 100% or more each and every year, even I would be suspicious.No, these same investors have reaped all their gains and no one should reimburse them for any "loss". Their gains over the years have more than covered any current loss! The rest of us, the small investors have lost over 40% in recent months too, and who would reimburse us?? They got too greedy and got burnt! So be it, and accept the loss just as the rest of us are - we have no choice, and a resounding NO to any bailout of these already fat cats.

[spiritwalk]

Many of those who profitted from the scheme were financial investors themselves. It is impossible to believe that these people did not know what was going on when so many other people were aware and trying to alert authorities.
They might not have been active participants in the scheme, but they were certainly passively involved, probably to the point of trying to convince others to invest, further down the pyramid, knowing full well that they would get some of that money as it passed up to Madoff at the top.
This is turning out like some Mafia story. Madoff is the don and these big investors his lieutants. They do the killings, get the money and then get immunity to testify against the don while they walk free. Then they will make a new fortune witing thei memoir and being CNN''s expert commentator.

[mnelsonix]

Their lucky ranks include the Fort Worth Employees Retirement Fund, which invested $7.5 million in a Madoff-related hedge fund years ago, then cashed out last summer after a consultant raised concerns about the investment.

The consultant, due diligence firm Albourne Partners, of London, had long been skeptical of Madoff''s reported investment returns.

Fort Worth walked away with $10 million - a sum that included $2.5 million in what now appears to be fraudulent profit.
___________________

Now this is a conundrum. Should they get to keep the profit?

And this "Albourne Partners, of London" should run the SEC!

If Albourne Partners, of London could see this coming for a long time, why couldn''t the SEC? And why is the SEC so eager to fry small fish like Martha Stewart?

We are such a corrupt society.

[mnelsonix]

It wont let me say basttardds

[antoniof123]

Oh too bad you gamble with fate and you may lose now these rich people want their money back.

No bail outs for these scum do you here.