Clawback Lawsuits on Rise in Aftermath of Ponzi Schemes

The criminal case against Bernie Madoff ended with a 150-year prison sentence in 2009, but many of his victims are still looking for the return of their share of the billions of dollars lost in the biggest Ponzi scheme in U.S. history. The majority of the money, however, is not expected to come from Madoff or the sale of his assets. Those who are expected to pay the lion's share of the losses are other victims - and those who benefited - from Madoff's Ponzi scheme.

The appointed bankruptcy trustee in the Madoff case has initiated dozens of lawsuits against so-called "net winners," investors in the scheme who withdrew more money from their accounts with Madoff's investment firm than they originally contributed. Dubbed "clawback" lawsuits, they refer to a provision in the bankruptcy code that allows the trustee to void certain types of transactions, like fraudulent transfers, and recover or "claw back" the assets. Money recovered in clawback suits is typically divided equally among the victims. So far, the trustee in the Madoff case has recovered $1.8 billion. And 15 additional lawsuits have since been filed seeking to recover another $15 billion. Finally, as recently as mid-December 2010, the widow of billionaire businessman Jeffry Picower agreed to return $7.2 million that Mr. Picower had withdrawn from his Madoff accounts under the belief that he was withdrawing profits. Of course, it now has been exposed that such profits were fictitious, having been made up by Madoff.

Clawback suits used to be rare because when most Ponzi schemes go bust, there is little or no money left to recover. In recent years, however, there has been money to recover - not only from individual investors who may or may not have been privy to the scheme, but also from charities, foundations and other organizations that unwittingly invested and then withdrew what they believed to be profits, but which actually was nothing more than money that had been deposited into the scheme by later investors.

In addition to the Madoff case, other schemes that have resulted in clawback suits include the $3.7 billion Ponzi scheme ran by Minnesota businessman Tom Petters; the $450 million lost in the Bayou Management hedge fund fraud operated by Samuel Israel III and Daniel Marino; and the $593 million Ponzi scheme orchestrated by Santa Barbara unregistered money manager Reed Slatkin.

In the recent Petters case, it is anticipated that more than 200 clawback suits will be filed.

"Net Winners" Fight Back Against Lawsuits

Bringing clawback suits to recover assets from victims of Ponzi schemes is not without its critics. Those who are defendants in clawback suits in the Madoff case have pointed out that they too are victims of the scam. They argue that they had no knowledge of the fraud and had every reason to believe the money they withdrew from their investment accounts was legitimate profits and was rightfully theirs. They also assert that they lost money in the scam because their accounts had much less in them than they were led to believe, even if it was more than their original investments. For some of these net winners, they rely on this money for living expenses. Repaying the money would leave some net winners - many who were individual investors - virtually penniless.

Advocates of clawback suits argue that it doesn't matter that net winners may also have been duped. The money net winners withdrew from their accounts likely belonged to the multitude of investors who lost money. Advocates also argue that, under the bankruptcy law provision, any money transferred to investors in the Ponzi scheme before it collapsed was a fraudulent conveyance. As such, the money should rightfully be recovered in a clawback suit.

In the Madoff case, targets of clawback suits are fighting back and many have appealed. They argue that their final account statements (rather than their original investment amount) should be the basis for deciding the legal claims against them. If the appeals courts side with them, it could mean an end to the clawback suits. Ironically, it also could entitle them to take legal action against the trustee to recover some of the money they lost in the scheme.


Dimond Kaplan & Rothstein, P.A. has significant experience both defending net winners against clawback suits, and prosecuting clawback suits on behalf of court-appointed receivers and defrauded investors who lost money. Contact the securities fraud attorneys of Dimond Kaplan & Rothstein, P.A. for an evaluation of your case.

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