Friday, April 10, 2009

White Collar and Securities: Madoff Trustee Begins "Clawback" Suits

Irving Picard, the court appointed trustee who is liquidating the assets of convicted con artist Bernard Madoff has filed his first law suits seeking the return of funds withdrawn by Madoff investors. Picard has sued Viscaya Partners, Ltd., a British Virgin Islands investor and its bank Safra, Ltd. The suit asks for $150 million. The suit alleges that Viscaya transferred the $150 million from Madoff's Bernard L. Madoff Investment Securities, LLC, to Safra on October 31, 2008.

The "clawback" provision of bankruptcy law allows the trustee to seek recovery of funds paid out by the bankrupt estate within six years of the bankruptcy. In this instance the trustee is seeking the return of monies paid that were fictitious profits. In other words, trustee is claiming that the $150 million paid to Viscaya was not profits derived from its investment with Madoff. Instead, that sum is really money defrauded from more recent Madoff investors - the essence of a Ponzi scheme.

Generally, in situations involving such a scheme, the trustee/receiver will seek to exercise "clawback" rights to recover fictitious profits paid. Less certain is whether the trustee will seek the return of principal invested from those whose withdrawal have involved the return of at least some principal. Legally, no set of victims is more entitled to recovery than the rest of the victims. However, in practice trustees sometimes to not seek to exercise "clawback" rights against those who have withdrawn principal. In the Madoff matter the trustee has not yet disclosed how he will proceed in these instances.

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