Madoff Trustee Files First "Claw Back" Lawsuit

The trustee charged with recovering money for defrauded Bernard Madoff

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investors has sued one of those investors. According to The Wall Street Journal, 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 before the entire sad affair is finally put to rest.

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 scheme’s like Madoff’s, such withdrawals are paid using other investors’ money.

The lawsuit was filed in bankruptcy court in Manhattan against Vizcaya Partners Ltd., a Madoff investor based in the British Virgin Islands, and the investor’s bank, Gibraltar-based Banque Jacob Safra Ltd, The Wall Street Journal said. The lawsuit is seeking to recover about $150 million that was withdrawn just six weeks before Madoff confessed his Ponzi scheme.

According to Newsday, the Madoff trustee is asking the bankruptcy court to wipe out the transfer and put the $150 million into the larger of recovered assets that will be used to repay Madoff victims – including Vizcaya. Picard said the transfer is a “preference” payment that shouldn’t be allowed since it took place within 90 days of Madoff’s fraud admission.

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.

The Madoff trustee has so far recovered about $1 billion in assets that will eventually be divided among the Ponzi schemer’s victims. Unfortunately, most experts believe Madoff’s victims will only recover pennies on the dollar.

In addition to the asset liquidation, some investors might be able to recover up to $500,000 each through the Securities Investor Protection Corp. (SIPC). The SIPC, which acts essentially as an insurance fund for victims of securities fraud, sent out 8,000 claim forms to Madoff investors who might be eligible for recovery in early January. However, third-party investors – those whose Madoff investments were made through other entities – might not be eligible for the full SIPC benefit. Those investors could choose to sue the third party, and some hedge funds have already been named in such lawsuits.