Madoff Fraud Losses Could Spread to Those Who Got Out

Even investors who pulled their money out early could sustain substantial losses as a result of the alleged investment fraud committed by Bernard Madoff.  According to a report on Reuters.com, those investors could ultimately be forced to turn over any profits they made from their Madoff investments.

Madoff – once a chairman of the Nasdaq stock exchange – is the founder and primary owner of Bernard L. Madoff Investment Securities LLC. The firm is primarily known for its business in market-making, or serving as the middleman between buyers and sellers of shares. However, Madoff also oversaw an investment-advisory business that managed money for high-net-worth individuals, hedge funds and other institutions.

The 70-year-old Madoff was arrested on one count of securities fraud late last week.  According to the FBI complaint against Madoff,  his investment advisory business was largely a Ponzi scheme.   Employees of Madoff’s firm told the FBI that Madoff himself estimated the scheme could cost investors as much as $50 million.

According to Reuters, because of a legal concept known as “fraudulent conveyance,” investors who took their money out of Madoff’s funds before the fraud was discovered might have to return their profits to help offset losses incurred by others who stayed in.   Basically, those “profits” were just an illusion, because Madoff was simply using funds from new investors to pay off old ones.

Last week, a federal judge ordered that Madoff’s business be liquidated under the jurisdiction of a bankruptcy court and assigned a  trustee to oversee that process.  According to Reuters, a bankruptcy allows the estate’s trustee to go back six years to recover moneys from fraudulent conveyance.  One expert told Reuters that for investors who got out during that time, “anything past your principal” is  “fair game to be brought back in.”  However, a judge could decide to limit how many years back the estate can demand investors return their money, Reuters said.

The end result is likely to be a substantial amount of litigation.  Another expert told Reuters he expects the Madoff fraud to yield three types of lawsuits.  One type would focus on fraudulent conveyance.  Another would go after feeder funds set up by outside investment advisory firms that marketed Madoff’s investments to high net-worth individuals and pension funds. A third group of lawsuits will likely be filed against financial advisers who entrusted 50 to 100 percent of their clients’ money with  one manager.

The expert told Reuters that the litigation stemming from the Madoff fraud would be “staggering”, and could play out for “years and years”.

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