February 26th, 2009

A new fear for Madoff’s victims: clawback

clawback2.jpg

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.

12 Responses to “A new fear for Madoff’s victims: clawback”

  1. Occam's Beard Says:

    When did we start with this “do-over” business?

    And how far back can events be unraveled? Suppose a Madoff investor had himself defrauded someone to raise the cash? Imagine the lawsuits that that would generate!

    This do-over business in business is of a similar ilk to notions of who owns land. The southwest used to belong to Mexico and the American Indians. No, wait, it belonged to the Aztecs. But Aztecs took land from other tribes. But, wait, all of the Indians came across the Bering Strait, so it belongs to the mastodons, who aren’t around to collect.

    Same thing with Arabs and Jews in the Middle East, or Muslims and Spain, Australia and aborigines, the list goes on and on.

    Ultimately everything belongs to the late inhabitants of Olduvai Gorge, I guess. But, wait, they’re not only victimes of injustice, but aren’t they also perpetrators of it?

    Sometimes it’s not easy being a liberal.

  2. Wolla Dalbo Says:

    In past eras Madoff would have already been “induced” to cough up his loot.

    Now he sits, smirking, in his Penthouse, while the suffering he has caused spreads and multiplies, and more and more people are being dragged under or are going to be. What really gripes me is all the old people, all the retirees who have been effectively stripped naked and are being thrust out into the cold.

    Is this justice? We have become too civilized to survive.

  3. Artfldgr Says:

    They say payback’s a bitch.

    and this ones in heat…

  4. Artfldgr Says:

    And how far back can events be unraveled?

    well, dont you all remember the precedents we agreed to? the ones that were against those we didnt like enough to treat equally under the law?

    like those who wanted money for the jews after wwii? or reparations for japanese, or africans…

    this is just the logical extension of laws like that that sought to turn over the prior laws that let us get past the past. or to refer to shakespeare and hitler, salic lands and the return of germans to the fold (the exact same thing as russian in georgia recently rescuing ost russians).

    the reason we dont see history repeating, which is neos other post i will get to, is that we are no longer capable of seeing equivalents as equivalents.

    how did someone put it the otehr day?
    ah yeas

    a DISTINCTION WITHOUT A DIFFERENCE

    socialism communism.. a distinction without a difference. you wont be able to read history and see it repeat if you think two things that are the same are differnt.

    but that is the point of another thread.
    (everything is conneted)

    take seizures as a precident. the constition says that seizures of property are not allowed.. but we allowed them under the drug laws… we hated those people who had too much fun in life doing drugs while we worked hard, the same thing we applied to the wealthy too… and see, we are seizing their property too… and drunks… and those with extra homes…

    same with social security… it set the precidence for wealth distribution, as long as the stake was in the ground, we would neve be free of it.

    it islamics are attempting to go back prior to sept 11 1680 in vienna..

    how far back can it go?

    as far back as we will allow them to go and accept a false argument that lets them!!!

  5. Artfldgr Says:

    A distinction without a difference is a type of argument where one word or phrase is preferred to another, but results in no difference to the final outcome. It is particularly used when a word or phrase has connotations associated with it that one party to an argument prefers to avoid.

    “In legal terminology it means a change in definition which does not change the set which is defined. For example changing ‘unseparated married men’ to ‘males who have a non-separated spouse’ is a distinction without a difference.”[1]

    An example from the 2008 film Changeling comes when a police captain is being questioned about his decision to institutionalize a woman. When the questioning attorney describes the woman as having been “thrown into the mental hospital” the policeman asserts that “She was not thrown, she was escorted.” In either case the result is the same.

    The phrase can also have a meaning beyond the preference for euphemisms. In general this involves an over specificity with regard to terminology which, while technically correct and accurate, does not change the overall meaning or understanding of the case in point. For example, some people characterized anti-Muslim comments made by an United States Representative as “racist.” While someone might technically quibble that Muslims are not a race and that therefore his actions were not “racist” this is a distinction without a difference since prejudice on religious grounds is not generally considered any more socially acceptable than prejudice based on racial grounds.

    this can be applied to

    socialism facsism communism feminism…

    all of them are distinctions with no difference… and we thing they are differnt because we made them seem distinct…

    socialism is a canadian goose, fascism is a mallard, communism is a emu, and feminism is a ostrich..

    if we are so focused on diversity to make everythin different, arent we also underfocusing on sameness, in whcin synonyms would reveal the truth?

  6. Artfldgr Says:

    oh.. going after the fruits of things they got off the bad investments. is the logic of black reparations recasted abstractly to this. let this happen, and you have to let reparations happen. and you then allow people today to lose their property because they benifited from the bad of the past

    this is called arranging all your pieces on the board.

  7. dane Says:

    This is reminds me of what happened with PIE (Pacific Intermountain Express). I can’t remember the exact dates but when it fell upon hard times it started selling it’s freight services at less than the tariff rates in order to try to get it’s cash flow going. Well it didn’t help enough but they sold millions of dollars worth of freight services that way. They finally declared bankruptcy near the end of 1990 and the court appointed receiver went about suing the customers who had paid less than the tariff rates for the difference. Apparently it was legal and the receiver said they should have known and so therefore colluded with PIE to commit fraud. The customers were just trying to get the best deal they could.

    I also see a lot of correlation with the way the government is posturing these days.

  8. Oblio Says:

    Splendid point, OB. There is no point at which you can stop rolling back and say, “If we could only return to the status quo now, we would have justice.” And if we have to wait until groups of people FEEL they have enough recognition, respect, and compensatory treatment, we will be waiting a very long time. No Justice, No Peace, they say. I say, that is a recipe for no peace at all, ever. Indeed, I don’t think we will ever have permanent peace.

    I can think of a hypothetical case in which clawback would be appropriate, but I think we will have to wait for more facts before we can separate the sheep from the goats among the Madoff investors with any degree of certainty.

    What a mess! I count my lucky stars that I have managed to lose money in a way that only leaves myself to blame.

  9. wrm Says:

    I am amazed at the arguments being put forward in a normally pretty level-headed blog. I am neither an accountant nor a lawyer, but I see the argument for clawback as being pretty strong in that Madoff actually had no earnings so all the payouts were actually from other people’s accounts. People are not being victimized twice – those who thought at first they had dodged the bullet by having withdrawn their funds are only suffering delayed victimization.

    Consider the following hypothetical scenario: Madoff claims gains of 10%/year but is actually losing 20%/year (mostly due to withdrawals). You put in $1,000,000. After a year he sends you a statement saying you have $1,100,000. You pull it all out. In reality, your account is worth only $800,000, and the other $300,000 he sends you is taken from other people. After the clawback process process is done, you will get back some fraction of the $200,000 in principal you lost. (Plus two cents on the dollar from the money Bernie had at the end!)

    In the process described in the LAT article it is being assumed that all accounts have an actual value of $0, and you will get back some (hopefully large, depending on how much is clawed back) fraction of your initial $1,000,000.

    This will feel pretty harsh. The talk of “do-overs,” “black reparations”, etc is not germane to the actual situation.

  10. neo-neocon Says:

    wrm: clawback idoes not appear to be limited to those who withdrew their funds. If it were, that would be a different story.

  11. Ymarsakar Says:

    And this is how a nation falls to death and chaos, Neo.

    Engineered by the brilliant and off limits Madoff or Obama, it matters not in the end.

  12. RoverDaddy Says:

    I don’t see this as a politically charged issue at all. If I ‘invested’ $10000 with a friend and in return received an automobile, which it turns out he actually stole from somebody else to give me, I’m the one who’s screwed, not the original owner of the car. My ignorance does not protect me from having to give the car back. If I sold or trashed the car, I’m STILL on the hook for it’s value.

    Also, contrary to what neo says above, it’s since been reported that only people who came out ahead (i.e. withdrew more money than they paid to Madoff) would be subject to claw back attempts. Makes perfect sense to me.

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Previously a lifelong Democrat, born in New York and living in New England, surrounded by liberals on all sides, I've found myself slowly but surely leaving the fold and becoming that dread thing: a neocon.
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