They say payback’s a bitch.
But clawback seems even worse. It means that Madoff’s victims run the risk of being victimized twice—once by Madoff, and then again by each other via lawsuits.
That’s hardly their intent. It’s just that the money they invested with Madoff is nowhere to be seen, and many people have lost their life savings or a large portion of their assets.
With Madoff off-limits for the moment, how to recover? The legal theory is that, since the “investors” had been earning high interest from Madoff for years (and paying income taxes on it), even though they had no intent to defraud and no knowledge of the scam and may never see their principal again, they have been benefiting from the fruit of the forbidden tree. At least till now.
And so the idea is to force them to pay back what they were given by Madoff over the years, pool those resources, and divide them equitably among the victims. The only problem is that many have already spent the money, or never got it in the first place but instead reinvested it with Madoff. And it is offset, of course, by what they’ve lost.
Not only that, but it seems it might even be okay to go after victims’ other assets in order to collect. This process appears especially unconscionable in the case of the smaller, individual investor. Chasing some of the larger and still-solvent charities and other institutions, the ones with the deep pockets, still seems wrong, but not as offensive as chasing the smaller private investors.
The former—going after the institutions—apparently is already happening:
Joe Grundfest, a Stanford University securities law professor, predicted complex and controversial legal actions among the Madoff victims, including charitable foundations with considerable assets that could be tapped and thousands who counted on the fund’s proceeds to support them in old age.
“You can imagine that litigation of that sort gives rise to many potential problems and appearances of harshness,” said Grundfest, raising the prospect of charities that used investment proceeds for humanitarian causes being hit with demands for the return of money already spent. “It’s going to be hotly litigated.”
In New York, Atty. Gen. Andrew Cuomo has already signaled that such investors are under scrutiny. He has served subpoenas on at least a dozen universities and nonprofits that took investment advice from Madoff intermediary J. Ezra Merkin.
But individuals are hardly exempt:
…what everyone is bracing for, if you take the Bayou case as an example and blueprint, is the trustee filing claims against anyone who redeemed or received profits in the last six years.”
A primary residence is fully protected from bankruptcy seizure in a few states, such as Florida and Texas, but in California the homestead exemption is only $75,000 per couple under 65 and $200,000 for those at or above retirement age.
The court-appointed trustee in the Madoff case, Irving Picard, is mulling it all over. Meanwhile, the innocent victims wait and wonder—and get ready to claw at each other, whether they want to or not.