2/17/09

LAT: Madoff Victims Fear Clawback Lawsuits

If you were an victim-investor with Bernie Madoff and were "lucky" enough to take out some of your money over the years, you probably will be hit with a clawback lawsuit seeking some of your money under an exotic Talmudic theory of the law.
Alleged Madoff victims may be vulnerable to other victims' claims. Those who profited before suffering losses -- including retirees and charities -- could be hit with demands to give back cash in a settlement.
By Carol J. Williams

Santa Monica retiree Bob Braslau considers himself a victim of accused fraud mastermind Bernard L. Madoff.

But the court-appointed bankruptcy trustee, he fears, might consider him a beneficiary.

Braslau was among the thousands who lost money when the Madoff fund collapsed amid allegations that it was a $50-billion Ponzi scheme. But because Braslau had taken out some proceeds over the years, he could be forced to return those earnings if a court determines they weren't real investment returns, simply money from other victims.

"I do feel in jeopardy," said Braslau, a former aerospace engineer for TRW Inc. who invested with Madoff through Stanley Chais, a Beverly Hills money manager. "People are going to be frantic in trying to recover their money."

Some of the charities and foundations that lost millions with Madoff are also potential targets in the gathering scramble to recover cash from those who profited to distribute among those who did not.

Madoff, 70, has been under house arrest at his luxury Manhattan apartment since Dec. 11. The former Nasdaq chairman is reported to be cooperating with investigators while awaiting trial on securities fraud charges.

Irving Picard, a partner with law firm Baker Hostetler appointed by the federal Bankruptcy Court to recover assets for distribution to defrauded investors, has so far found $830 million and sent out 8,000 letters to potential claimants.

In pursuit of other funds from the lost Madoff fortune, Picard is expected to employ a little-used legal tool, the "clawback" suit, to collect what remains of the alleged scheme's payouts for a more equitable redistribution, analysts say.

The track record for clawbacks is limited because Ponzi scheme victims are typically left with little that can be recovered. Retrieving funds can also be difficult if those who profit take their proceeds abroad, where the trustee may have no jurisdiction.

But there have been successful efforts to recover money. After the Bayou Management hedge fund, run by Wall Street stalwarts Samuel Israel III and Daniel Marino, collapsed in 2005, the court-appointed receiver managed to recover about one-third of the $450 million lost by investors.

In another case, groups affiliated with the Church of Scientology agreed in 2006 to pay back $3.5 million they received from former Santa Barbara money manager Reed Slatkin and others who invested with him. Slatkin is set for release in 2014 from the U.S. penitentiary at Lompac, where he has been serving time in connection with a $593-million operation in which money from some investors was used to pay off others -- the classic definition of a Ponzi scheme.

"The legal basis for the trustees being able to clawback is the allegation that the transfer of any of the proceeds to anyone in a Ponzi scheme is a fraudulent conveyance," said Bob Klueger, a Los Angeles attorney who specializes in asset protection.

"The theory behind it is that if it was a Ponzi scheme, the trustee is not bound by any considerations of who got in early and who got in late. The trustee is permitted to treat everyone the same, take back all money invested and divide it up evenly among all the investors," Klueger said...more...

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