Investors Plight Recouping Funds From Madoff Scandal May Take Years
Written by Risa Polansky on December 25, 2008
By Risa Polansky
Investors looking to recoup money lost in Bernard Madoff’s $50 billion swindle won’t get much from Madoff companies themselves, experts predict.
And this will make third parties — investment advisers, accountants and others — litigation targets.
In "most Ponzi schemes, the perpetrator of the scheme when he gets caught has a small percentage of what was originally deposited," said Boca Raton-based securities attorney Robert W. Pearce. "They’re generally the person of last resort" if victims want to recover their investments.
But if another entity — such as an investment adviser — introduced a client to the fraudulent money manager, "those companies are potential sources of recovery," he said.
Wall Street money manager and former NASDAQ chairman Mr. Madoff was arrested this month for an alleged scam that lost investors an estimated $50 billion.
He called his operation "one big lie," according to media reports, and described it as a "Ponzi scheme," which involves showing investors returns using money deposited by subsequent investors rather than actual profits from real business.
The magnitude of the losses in the Madoff con means it’s unlikely investors will recover much from Madoff entities directly, agreed Andrew C. Hall, partner and trial lawyer with Miami-based law firm Hall, Lamb and Hall.
Instead, "what you really need to be looking at is who are the other people who may have gotten you in or not protected you," such as investment advisers, auditors, banks or accountants.
Individual investors "are very busy, usually wealthy people, and they almost always rely upon others to do the things that are necessary to verify the legitimacy of the investment," Mr. Hall said.
He suspects these "others" could soon become targets for recovery.
"I know that’s developing right now," he said.
The New York Times reported the same Monday, noting that New York Law School, an investor in a feeder fund, has sued BDO Seidman, the auditor of one of its money managers, for missing red flags in the scam.
John M. Hogan, a partner in law firm Holland & Knight’s Miami office and chair of the firm’s new Madoff Advisory Group, also said that "people are going to be looking for possible defendants that have assets — like investment companies."
The tricky part: some players could find themselves on both sides of litigation.
Holland & Knight is getting calls from clients who invested others’ money that eventually ended up with Madoff companies, he said.
"Those people are trying to recoup the money they lost while at the same time have concerns that the people who gave them the money may try to hold them responsible."
Such clients "may end up as plaintiffs, and they’re afraid they may end up as defendants," Mr. Hogan said.
To win the cases, investors must prove negligence or breach of fiduciary duty on the part of advisers.
It’s negligence that helps crooks pull off Ponzi schemes in the first place, said Mr. Pearce, once an attorney with the US Securities and Exchange Commission.
"These schemes are perpetrated by lax investigation or no investigation by individuals into either the person’s background or the mechanics of the investment," he said.
Those who involved clients with Madoff entities or failed to pick up on the scam could be liable. "It all depends on what they were hired to do."
The attorneys predict it will take years to unravel the massive and tangled scam.
"Nobody will see money for probably three-to-four years from now," Mr. Pearce said.
His advice for future investments: "Investigate; know who you’re dealing with. Look out for abnormally high returns, and you want to have audited financial statements if you’re dealing with a significant amount of money. You want to have some third party, real person, independent doing the numbers."