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Madoff and Clawbacks

December 11 Was Not a Good Day for Madoff BernardMadoff

Bernie Madoff was arrested on December 11, 2008 in the largest Ponzi scheme ever devised. In March 2009, Madoff pleaded guilty to 11 federal felonies and admitted to turning his wealth management business into a massive Ponzi scheme that defrauded thousands of investors of about $65 billion. The irony is, if Madoff  hadn’t faced $7 billion in redemptions, the Ponzi scheme might not have been discovered. On June 29, 2009, he was sentenced to 150 years in prison, the maximum allowed.

Irving Picard, the trustee appointed to unravel Madoff’s finances, has filed hundreds of “clawback” lawsuits against banks, feeder funds, investors and others alleged to have profited from Madoff’s decades-long crime. ( Picard v. Kohn, 10-5411, U.S. Bankruptcy Court, Southern District of New York). Picard’s two year window of opportunity closed on December 11, 2010. Ironically among those sued was Madoff’s son Mark, who hung himself in his Manhattan apartment with a black dog leash on the same day, the two-year anniversary of his father’s arrest. "Mark Madoff  had made it clear that he felt his family ... would be better off without 'this' hanging over them all, forever," a source told the NY Daily News.

The basis for the “clawback” lawsuit is that some investors profited handsomely from  Madoff’s scheme gaining large returns while others lost everything. The suits aim to force those who profited by the “ill-gotten gains” to return these amounts for distribution to the losers. Jeffry Picower, rather than Madoff, appears to have been the largest beneficiary of Madoff's Ponzi scheme, and his estate settled the claims against it for $7.2 billion. Recently, Picard sued Bank Medici AG and its founder, Sonja Kohn, as well as Bank Austria, UniCredit SpA and dozens of other parties. He is seeking $19.6 billion from them, which could potentially triple to $58.8 billion under the Racketeer Influenced and Corrupt Organizations Act. It’s the biggest claim filed by Picard.

Others named in clawback suits include HSBC Holdings Plc for $9 billion. Picard alleged Europe’s biggest lender enabled Madoff’s fraud. Picard previously sued JPMorgan Chase & Co. for $6.4 billion over claims the New York-based bank aided and abetted the fraud. Citigroup Inc.’s Citibank, Bank of America Corp.’s Merrill Lynch unit and five other banks were sued by the trustee to recover more than $1 billion. All of the banks have denied wrongdoing and vowed to fight the lawsuits.

Picard also sued the owners of the New York Mets baseball team for the return of profits earned from their Madoff investments. New York Mets owners Fred Wilpon and Saul Katz and associated individuals and firms, received $300 million from the scheme according to the lawsuit. Wilpon and Katz have "categorically rejected" the charges.

Bernie Madoff  recently spoke to the New York Times from the federal prison in Butner, N.C. It was his first interview for publication since his arrest. Perhaps the most surprising revelation was that while his family never knew about his fraud, unidentified banks and hedge funds certainly did, and that they were “complicit” in his fraud. The assertion represents a reversal on what Madoff previously said that he alone was responsible for his massive Ponzi scheme. Madoff said he had told Picard: “I am saying that the banks and funds were complicit in one form or another and my information to Picard when he was here established this.” Madoff criticized Picard’s ambition, claiming that he was seeking far more money than was needed to resolve valid investor claims. He argued that Picard’s responsibility was to return only the $20 billion in out-of-pocket cash. Bernie seems to have perfected the art of blaming others for his wrongdoing.

While it may seem clear that clawback suits are the right thing to do, there are ethical issues that should be considered. If the investors did not know the returns were based on fraudulent activities, should they be penalized? What if the investors used their returns to invest in the stock market and lost everything in the meltdown, should this be taken into consideration in deciding whether to file clawback suits against them and how much should be redistributed? What is the key ethical principle that should guide trustee Picard’s actions? It would seem to be fairness. That is, the losses should be spread proportionately to investors who lost all their money and those who received some returns.