We at Maslon have had numerous questions from our interested clients about the consequences of Madoff's financial fraud. We also recognize how significant this matter is to our clients and our community. While the issues are complex and will likely vary with the particular circumstances of each investor, we have attempted in this short alert to preliminarily address some of your questions.
What wrongdoing did Bernard Madoff commit?
On December 11, 2008, the SEC filed a civil action against former NASDAQ-chairman Bernard L. Madoff ("Madoff") and Bernard L. Madoff Investment Securities, LLC ("Madoff Securities"). The SEC alleges that Madoff conducted a Ponzi scheme through Madoff Securities and obscured trading losses over an indeterminate period of time by paying purported returns to existing investors with funds contributed by different, subsequent investors. Total liabilities of Madoff Securities are alleged to be approximately $50 billion.
Will investors be able to recover their funds from Madoff Securities accounts, and if so, how much?
That will not be clear for a period of time. The SEC has obtained several forms of preliminary relief from the federal court for now, including: an order "freezing" the assets of Madoff and Madoff Securities and appointing a receiver for Madoff Securities; a preliminary injunction against initiating a bankruptcy proceeding without the court's approval. Separate criminal proceedings are pending against Madoff, who was arrested on December 11, 2008. Furthermore, on December 15, 2008, the Securities Investor Protection Corporation ("SIPC") became involved in the proceedings, with a federal court appointing a trustee to liquidate Madoff Securities under SIPC supervision.
Madoff Securities investors may be able to recover part of their investments in several ways, which will be impacted by the civil and criminal cases. First, there are certain to be numerous civil class action lawsuits against Madoff and/or Madoff Securities and/or other third parties. Second, if a court or a jury finds that Madoff and/or Madoff Securities actually stole money from certain clients through the operation of the Ponzi scheme, as opposed to causing losses for clients through poor investments, individual investors may be eligible to receive up to $500,000 from SIPC to cover the losses. SIPC has indicated that it is too early to tell what protections might be available to Madoff's customers because of the state of Madoff Securities' records. Third, in addition to civil class action lawsuits, if the SEC succeeds in the civil lawsuit, Madoff Securities investors will be eligible to file claims with the SEC. The SEC together with the receiver would attempt to collect all of the remaining assets for pro rata distributions to investors. Suffice it to say that it will take many months, or even years, to determine the extent of the recovery, if any, by investors.
I have heard that I may have to pay back some of the distributions I received from the Madoff organization – is that true?
The bankruptcy code and certain other laws make certain transfers of money from a debtor subject to a statutory "clawback" mechanism. It is likely that the receiver or a trustee will initiate actions against some or all of the investors who made withdrawals and received distributions. Depending on the theory used by the receiver or trustee, these actions may extend to payments received months, or even years, ago. Current or former Madoff Securities investors should be aware that these types of claims for repayment are possible, but may vary depending upon the circumstances of the particular investor.
What are the tax consequences of my losses?
There are tax consequences and investors should seek individual tax advice. Here are some thoughts. Losses from theft as opposed to investment losses receive different tax treatment under the federal tax code. Investors may have overpaid personal tax based on fraudulent account statements from Madoff Securities in recent years. Investors may need to preserve their rights to claim refunds for prior years.
How can the Maslon firm help?
The Maslon firm is experienced in handling a wide range of legal issues relating to bankruptcy and workout situations, securities fraud, tax and other business advice. If you are a Madoff Securities Investor and would like additional information regarding these cases, or would like to discuss any potential issues you may have related to Madoff or Madoff Securities, please contact your counsel or friend at Maslon or any of the attorneys listed to the right.
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