Publication

March 5, 2009Client Alert

Investors in Madoff Ponzi Scheme Who Got Out Before the Collapse Are Not Out of the Woods

Investors who sold before Bernard Madoff’s money management firm, BMIS, collapsed because of an alleged Ponzi scheme may not be out of the woods. Those who directly invested with BMIS but sold before BMIS fell may be compelled to give the money back so the trustee in charge of BMIS can distribute it pro-rata to all valid claimants. The BMIS matter is pending in bankruptcy court in New York.

How can this happen? The BMIS trustee has authority to use bankruptcy law or state law to demand the return of BMIS investment proceeds because those proceeds were part of a fraud. Under fraudulent conveyance law, money stolen by Madoff from one investor to pay another investor has to be returned to the trustee. Under New York law, investors who received money from BMIS as long ago as six years from the date the BMIS trustee was appointed face a possible claim by the trustee to return such proceeds irrespective of whether the investors knew they were receiving stolen property. Federal bankruptcy law provides the trustee with a two year look back period to clawback fraudulent transfers. Once the BMIS trustee has recouped money from those who received such stolen funds, he will ask the bankruptcy court overseeing BMIS to authorize payment to all valid claimants (investors) on a pro-rata basis. The principle behind letting the trustee strong-arm investors who got out early is to ensure that the defrauded investors are treated equally, as opposed to some getting their principal investment back or even profits while others get nothing.

For more information, please contact John C. Thomure, Jr. at 414.225.4946, or jcthomure@michaelbest.com, or Monica M. Riederer at 414.277.3459, or mmriederer@michaelbest.com.

back to top