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Judge Refuses to Block Investor-Forced Bankruptcy in Madoff Case

.!. Last week, the Securities and Exchange Commission (SEC) and the Justice Department (DOJ) asked a federal judge to block an attempt to force notorious Ponzi scammer Bernard Madoff into bankruptcy. Now, Bloomberg.com is reporting that Madoff might be forced into personal bankruptcy in a move to protect his investors and ensure his assets are […]

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Last week, the Securities and Exchange Commission (SEC) and the Justice Department (DOJ) asked a federal judge to block an attempt to force notorious Ponzi scammer <"https://www.yourlawyer.com/topics/overview/Bernard_Madoff_Investment_fraud">Bernard Madoff into bankruptcy. Now, Bloomberg.com is reporting that Madoff might be forced into personal bankruptcy in a move to protect his investors and ensure his assets are returned to the victims of his fraud, citing a federal judge.

Last week, the SEC and DOJ argued that forced bankruptcy was not needed to protect Madoff’s victims from collecting from his assets, saying that bankruptcy would be a wasted legal move. But, victims are concerned if bankruptcy is not forced, they will lose any chance of collecting their lost funds, said Bloomberg.com in an earlier report.

Despite SEC and DOJ objections, U.S. District Judge Louis Stanton in New York granted the request by Madoff’s victims, reversing his December ruling, said Bloomberg.com. The ruling does not mean that Madoff is being forced into bankruptcy, only that investors may force the move. “The concern that appointment of a bankruptcy trustee will increase administrative costs or delay recovery by victims is speculative and outweighed by the benefits to Mr. Madoff’s victims,” the judge said in a “four-page opinion,” quoted Bloomberg.

According to the judge, the bankruptcy filing might better enable creditors to access Madoff assets that are not “proceeds of his fraud,” said Bloomberg, citing Stanton, who also said that the filing might help investors who became caught up in the Ponzi scheme via feeder funds, explaining that the law, provides a “familiar, comprehensive” set of statutes for investors seeking “his personal assets other than those criminally forfeitable,” Stanton said.

Meanwhile, the trustee charged with recovering money for defrauded investors has sued one of those investors. According to a prior Wall Street Journal article, the so-called “claw back” lawsuit seeks to recover false profits from an investor who withdrew money from Madoff’s funds before his Ponzi scheme was revealed. It is likely that many other claw back lawsuits will be filed. Under the bankruptcy code, trustees may sue investors for any fictional profits and principal they withdrew in the six years before a fraud was exposed. The claw backs are permitted because in schemes like Madoff’s, such withdrawals are paid using other investors’ money.

On March 12, Madoff pleaded guilty to 11 fraud counts. The former chairman of the NASDAQ stock exchange ran an investment advisory business for decades that was, in reality, a Ponzi scheme. Last November, Madoff told his investors that his fund held more than $65 billion, but in reality, he only had a fraction of that amount.

Madoff faces up to 150 years in prison. In addition to a long jail term, U.S. prosecutors are also seeking as much as $170 billion in forfeited assets from Madoff. According to a prior Los Angeles Times report, that amount includes all of the money that moved through the Madoff accounts since the early 1980s, when the government says the investor fraud began. Madoff has been held at the Metropolitan Correctional Center in lower Manhattan since March 12.

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