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Madoff Investors May Face Clawback Suits

Investors who thought they escaped the Bernie Madoff morass with their assets intact may have another thing coming. Irving Picard, the court-appointed trustee recovering money for the scam artist's victims told the Wall Street Journal he is preparing to sue as many as 1,000 investors who withdrew more than they deposited with Madoff. He called them "net winners" and said they "have made money at the expense of the people who didn't." Picard plans to file his papers before the end of the year.

Such lawsuits, called "clawbacks," are not unusual after Ponzi schemes implode. The thinking behind them is that the money people withdrew wasn't really legitimate; it was money raised in fraud. So trustees such as Picard seek to win it back and then redistribute it in a more equitable manner. Some of the people Picard plans to sue may believe that they lost money to Madoff, even though they eventually withdrew more than they deposited. If, for example, their accounts were posting "income" for years, they may have had statements showing big balances when the Madoff scheme came to light in December 2008. That was phantom money, of course, but to the investors it may have seemed real until it went "poof!"

Big-bonused bankers dodged a similar bullet when U.S. pay czar Kenneth R. Feinberg said Friday, July 23, that he would not ask executives whose banks had received TARP funds not to refund any of their million-dollar bonuses.

Hardship can be a viable defense against clawback lawsuits, so folks who fear they are vulnerable should start documenting their lifestyles and their losses, and possibly calling lawyers. After all, the list of recent alleged and convicted fraudsters is long, and includes R. Allen Stanford, Nicholas Cosmos, and Matthew Pizzolato.

You may not be able to land a cushy job as a top banking executive, but you can at least steer clear of scam artists. Do that by avoiding ridiculous expectations. Most Ponzi schemers prevail because their "clients" are lured by the promise of unrealistic returns. Just last month, FINRA, the securities industry self-regulator warned investors to stay away from internet-based pitches offering 20, 30, or 100 percent returns per day. Seriously? Stocks are stalled, 3-year Treasuries are paying less than 1 percent, and you need a regulator to tell you that daily returns of 30 percent aren't legit? That's a good way to waste the regulators, who should be handing tougher stuff. And to get folks like Irving Picard interested in your bank account.

Photo by N1NJ4 on Flickr.
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