The legal fallout from Bernard Madoff’s epic fraud includes an ironic twist: a road map for investors wanting to hold on to profits that seem too good to be true.
In the eight years since Madoff’s arrest, a series of court decisions have favored investors who profited from the scam, damping the hopes of trustee Irving Picard to return more to Madoff’s victims who lost $17.5 billion in principal, legal experts say. At the core of the disputes is how far Picard can go to make the Ponzi scheme’s investors whole.
“The rulings all lower the risk associated with investing in something that might be a Ponzi scheme,” said Anthony Casey, a University of Chicago law school professor. “Some of these were inevitable conclusions of law. The courts weren’t necessarily being lenient to the big institutions. It just happens to help the wealthier investors.”
Picard and his team of New York-based lawyers have recovered about 65 cents on the dollar -- more than anticipated after the collapse of the biggest Ponzi scheme in U.S. history. And while the trustee’s recovery efforts continue on multiple fronts, including suits against some of Madoff’s biggest investors, the rulings took billions of dollars off the table and make a 100 percent return seem impossible.
They also provide a cheat sheet for investors on how to hold on to suspiciously robust returns, should it turn out they are the fruits of a fraud. Amanda Remus, a spokeswoman for Picard, declined to comment.
Invest From Offshore
Madoff customers who invested through offshore-feeder funds -- and whose profits were transferred to an overseas account before the scam collapsed -- didn’t need to return them, U.S. Bankruptcy Judge Stuart Bernstein in Manhattan ruled in November. Their cash should stay out of reach in deference to local jurisdictions, according to the decision, meaning victims must turn to non-U.S. courts to recover funds.
The ruling, which may be appealed, rejected the trustee’s claim that investors, including many American citizens, should be subject to U.S. law because they knew their money was going to be invested with Madoff’s New York-based company. It also took about $2 billion off the table for Picard from about 100 cases. The decision “creates a big loophole,” Casey said. “That’s a very straightforward way to reduce your risk if you’re a sophisticated investor.”
That situation benefited early Madoff investors such as Koch Industries Inc., the company run by billionaire brothers Charles and David Koch. They invested in a offshore feeder fund that placed money with Madoff’s firm, and the ruling allows them to keep more than $20 million they had withdrawn when they closed their account three years before the Ponzi scheme collapsed. Rob Carlton, a spokesman for the company, declined to comment.
“The court has made it easier for people to benefit from cheating and keep stolen money,” said Tamar Frankel, a Boston University law professor. “If you want to invest in a Ponzi scheme now,” she said, “do it from overseas.”