Did You Invest in Madoff? Here’s What You Need to Know...

[WSJ_law_blog]

Bernard L. Madoff, Dec. 30, 1999. (AP/The New York Times, Ruby Washington)


Seemingly disparate entities, such as the Palm Beach Country Club, the Elie Wiesel foundation, Spain’s Grupo Santander and Steven Spielberg’s Wunderkinder Foundation are all left wondering whether, when the smoke clears, there will be anything left of the money they invested with Bernie Madoff’s investment firm. (Click here for today’s WSJ front-pager detailing the alleged Ponzi scheme’s extraordinary reach.)

According to a separate story in today’s Journal, and additional reporting from the WSJ’s Dionne Searcey, while there may be very little money left to fight over in the Madoff case, lawyers are circling to duke it out for what’s left. However, even those Madoff investors who pulled money out before the scheme unraveled may have to pony up.

Past Ponzi scheme cases such as Bayou Hedge Fund and the case involving the International Management Associates, which bilked some $150 million from thousands of clients, among them Denver Broncos players, show that investors who’d taken out money may be subject to redemption claims or so-called clawbacks. Some of these types of claims could come should Madoff’s firm file bankruptcy. A trustee would argue that money taken out in years’ past never really existed because it was a Ponzi scheme and any money paid out was really someone else’s money, not an asset of the fund. The trustee would ask for the return of the money so it could be pooled and distributed among the victims.

Jonathan Sablone, a co-chairman of Nixon Peabody’s alternative investment litigation team said that, under bankruptcy rules, anyone who pulled out money within the past 90 days would most certainly have to pay it back. “If a month ago you said I want out, you’re first reaction to hearing all this is thank God I got out before this broke,” said Sablone, whose firm has had about 100 people from across the U.S. inquire about their rights and whether they should file suits. “But at some point you’re going to have someone knock on your door and say I want that back.”

Some individual investors may have claims only to the hedge funds who placed the investments in Madoff’s firm, and not to Madoff’s firm itself. Investors tied to so-called fund of funds involved may be even less likely to have claim to Madoff’s firm directly because of the layers of entities involved that handled their money between them and Madoff.

Not surprisingly then, the Journal reports, lawyers are gathering clients and trying to determine how to recover lost investments. Scott Berman, a New York lawyer, has been retained by investors in investment-management firms Tremont Capital and Fairfield Greenwich Advisors, which were heavily invested in Madoff’s firm. Berman says he is looking into whether the investment-management firms told clients that their investments were diversified, when in fact they were primarily only in Madoff’s funds. He is also looking into whether the firms failed to perform adequate due diligence on Madoff’s business.

“Tremont was victimized by not just a person but also a scheme and a complex process designed to deceive individuals and organizations, managers and analysts — including some of the largest and sophisticated financial institutions in the world,” said a Tremont spokesman.

A Fairfield spokesman said in a statement that investors in Fairfield Sentry, the fund with the most exposure to Madoff’s firm, “knew that Madoff was executing broker, and they understood they were getting a portfolio operated by Madoff.” Marc Kasowitz, a lawyer for Fairfield, said in a statement that the firm “conducted extensive due diligence and risk monitoring in its investments and dealings” with Madoff’s firm.

Madoff as hired hired a Dickstein Shapiro team that includes Daniel Horowitz, Mauro Wolfe, and Ira “Ike” Sorkin to defend him in the New York criminal case. Meanwhile, according to a Bloomberg report Madoff’s sons — Mark and Andrew — have tapped Paul Weiss’s Martin Flumenbaum.