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Tuesday, January 6, 2009

The Unlucky Lucky Madoff Investors

So you were lucky enough to receive money back from Bernie Madoff before his pyramid scheme collapsed? Think again.

The usual process in pyramid scheme recoveries is for the court-appointed Receiver to obtain all the financial records of the scamster, including bank accounts. Then, disbursements are traced to each recipient, who receive a friendly letter telling that they must send all the money they received back to the Receiver, so that the Receiver can pool the moneys together for distribution to all victims. Oh, and by the way, if the moneys are not returned then the Receiver will either sue the victim or obtain an order to hold the victim in contempt of court.

Upon receiving such a letter, the scam victim yells "Bloody Murder!" and immediately complains that they put more money into the scheme than they ever got back, and are still in the hole.

The Receiver just doesn't care. The money is not that of the victim, the money is that of ALL victims. The Receiver's job is to husband all the remaining assets of the scheme into the pool, and the assets include those that were paid out of the "lucky" victims before the scheme collapsed.

But what if the victim who received money doesn't have any ready cash on hand? Tough. The receiver can bring a lawsuit against the victim, obtain a judgment, and then liquidate the victim's other assets, such as houses, IRAs, etc., until the Receiver gets back all the money received from Madoff.

Brutal? Yes, but necessary to protect all victims. It doesn't make any sense than an investor who received money from Madoff a month ago should be in a better position than one who didn't. The strong powers of the Receiver to claw money out of "lucky" investors is also why there is actually the possibility of some recovery by all victims. In the Reed Slatkin scam, for instance, victims received upwards of 40% of their original investments back. In the Cash-For-Titles scam of the late 1990s, victims received over 70% of their money back.


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Saturday, December 27, 2008

Madoff Scheme Investors Will Have To Give Back Even If Less Than Original Investment

Some of the victims of the Madoff pyramid scheme are about to receive more bad news -- If they received any money back from Madoff, the Receiver will want it back.

When a pyramid scheme collapses, the Court appoints a Receiver to husband and sequester all the assets of the scheme for the benefit of all investors. The Receiver will create a Victim's Fund, and all victims will receive a percentage of the Victim's Fund based on the size of their original investment.

The assets of the scheme include payments that the scheme made to others, including payments back to investors. If a Madoff investor received anything back from Madoff -- even if it was less than their original investment -- they will have to give that amount of money back to the Receiver, to be pooled with any other money and assets that the Receiver can find, and then these investors will get their percentage of the Victim's Fund.

If a Madoff investor refuses to pay the Receiver back, the Receiver can sue the investor and make the investor pay the costs and attorney fees of recovery, in addition to getting the money back. In some situations, the Court may also issue order to hold a recalcitrant investor in jail for contempt. "Resistance," as one might hear in a sci-fi B-movie, "is futile." It can also be very costly.

Charities are not exempt from disgorgement. If a charity received money from Madoff, it had better be prepared to give the money back. Charities may have exemption from income taxes from the IRS, but charities have no special exemption at all from Receiver-ordered disgorgement of what amounts to criminal proceeds. This will hit a lot of charities hard at this time when the economy is sharply down and charitable inflows have slowed from a mighty river to a miserly trickle.

Receivers and disgorgement are one of the more unpleasant things about pyramid schemes, and have the effect of re-victimizing the victims, sort of like having a rape victim testify at trial. But it is necessary to protect the rights of all investors, and not just those who received redemptions from Madoff.

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