Thursday, March 12, 2009

More Madoff Civil and Criminal Suits to Come...

Madoff's guilty plea to 11 felony counts is just the beginning of what will be a long and complicated process to identify the full scope of the fraud, and to recover assets from Madoff, and others who profited from the fraud.

One point that may or may not be significant is that the fraud was not 50 billion dollars, but is between 10 and 17 billion, which is what we suspected when the story first broke. Either way, with only one billion having been recovered, there is much more work for the Trustee and the SEC staff to do to identify, and recover those assets.

With no plea agreement, we can expect the Trustee to attempt to attach the rest of Madoff's assets, and to go after the assets that are in his wife's name. According to press reports, Mrs. Madoff has significant assets in her name, including the $7 million penthouse on Manhattan's Upper East Side, $45 million in municipal bonds at a brokerage firm partially owned by Madoff, $17 million at Wachovia Bank, and she withdrew $15.5 million from the brokerage firm shortly before Mr. Madoff was arrested. Details are at the WSJ.

There is nothing in the press reports that indicates that Mrs. Madoff was a participant in the fraud, but she does not have to be if assets obtained by the fraud were transferred to her. That will be difficult to prove, but there is enough there to interest a prosecutor, a SIPC Trustee and a bunch of securities attorneys representing investors.

More indictments? I am sure that the prosecutors are not finished. There are the Madoff employees who allegedly helped the fraud by creating false account statements, and whatever else was done to assist the fraud. Given Madoff's plea allocution, it is clear he did not do this alone.

Some commentators are speculating that other family members will be indicted, but those claims are based on incorrect or incomplete facts. According to the information currently available, the brokerage firm employees had nothing to do with the investment advisory business. Therefore, we can expect to ultimately learn that the compliance officers at the brokerage firm had no involvement with, or knowledge of, the fraud. And no one would expect that they would - a brokerage firm compliance officer has no duty to supervise or control, the operations of the related investment advisory firm. However, prosecutors and the SEC will certainly be looking into them to determine if there is a case there.

Then there are the civil cases against those who received funds from the fraud, but those cases will undoubtedly be civil cases, not criminal.

Next up will be the feeder funds, who funnelled money to Madoff and accepted "fees" for doing so. We can expect to see indictments or at least SEC civil actions to recover those fees against them. We have been investigating claims against some of those funds, and at least on the civil side, there appear to be viable claims. Whether those rise to a criminal level remains to be seen.

Then there are the banks and financial entities in England, where Madoff was sending money to provide an appearance of activity. Those institutions may have liability for their assistance, if any, in the fraud.

After that, suits against profitable investors, for a return of those profits. We have also been reviewing those claims. Based on my prior experience in ponzi scheme cases and other fraudulent conveyance cases, there are some viable defenses for those investors. However, there have been no estimates of how much money those innocent investors received from the fraud, but their innocence may not be enough to protect them. Profitable investors have been contacting our firm and others for advice as to how to proceed going forward, and those lawsuits will be filed at some point in time.

We can be certain that the SIPC Trustee and the SEC will make every effort to locate and obtain funds obtained from the fraud. Whether those funds make it back to the investors remains to be seen. Past experience tells us that relying on the government to recover lost funds is a process that requires a great deal of patience. Investors should consider retaining their own counsel to examine their options, rather than wait for the government.
Post a Comment