3rd Parties Will Pay for Alleged $50B Madoff Fraud, Experts Predict
For those who invested in the claimed $50 billion Ponzi scheme allegedly run by Bernard Madoff under the guise of a hedge fund, exactly how they invested in the hedge fund could be crucial in determining whether they get their money back.
Those who put their money directly into the fund can probably kiss it goodbye, as far as litigation is concerned, although there is a possibility that potential so-called clawback recaptures of “profits” paid to earlier investors could help reimburse others, reports Bloomberg. “By the time they collect all of Madoff’s assets and liquidate them, providing there are no ‘clawbacks,’ there will probably just be enough to pay the attorneys’ fees,” predicts James Cox, a securities law professor at Duke University.
The most significant relief these direct investors probably will get is a hefty theft deduction on their tax returns, he tells the news agency.
But investors who funneled their money to Madoff through a third party, such as another hedge fund, are likely to be luckier in litigation. As discussed in an earlier ABAJournal.com post, they are already pointing the finger at those who put their money in the claimed Ponzi scheme. Critical to proving third-party liability is showing a lack of due diligence and inadequate disclosure about the nature of the investment.
A similar group of haves and have-nots are going to be established by claims made to the Securities Investor Protection Corp., experts say. Those who invested directly in Madoff’s hedge fund through an investment advisory group he used to operate it can’t collect from the SIPC. But those who put their money into the Madoff fund through a brokerage—including the one that Madoff operated—are covered by the SIPC umbrella, at least to some extent, explains New York investor attorney Stuart Meissner, a former securities regulator.
Investments stolen from a brokerage are covered up to a limit of $500,000 for securities and $100,000 for cash (money lost through bad investments isn’t). However, claimed securities purchases that prove to be fictitious are a gray area, Meissner tells Bloomberg.
Such SIPC claims could take several years to process. And there’s another issue, too, reports the Wall Street Journal (sub. req.): With a mere $1.5 billion or so in reserves as of the end of last year, “SIPC might not have enough in reserves to cover potential losses, experts say.”
While the Securities and Exchange Commission could loan SIPC another $1 billion or so, Congress would have to OK a further funds transfer to pay SIPC claims, says New York securities attorney Steven Caruso. “We’d be looking at another bailout, only this time it would be SIPC,” he tells the WSJ.
