2 responses to “Fox Business Video: Madoff Bankruptcy Trustee Will Seek “Clawbacks” Going Back Six Years”

  1. Good piece on Madoff situation. It’s actually worse and the below email might be able to provide you with additional thoughts/issues.

    I am an investor in Madoff, and while I know the situation is quite difficult for all involved, SIPC, the Bankruptcy Trustee, Federal Government and IRS need to, first, improve communication with investors impacted by this fraud and, second, come up with a sensible, structured solution.

    Today, the vast majority of investors who have lost money are worried that the government is going to come after them for money they have withdrawn from Madoff over the years. SIPC sent out claim forms, but the general consensus is the claim forms are a Trojan Horse – getting people to disclose detailed information, which can be used to have the Madoff trustee come after them using a clawback and renege on any claim payment. This is atrocious, as in most of these instances, investors are net losers on an after-tax basis, are charities where all the profits have been spent, or retirees living off Madoff funds over the years. Here is an example of a typical investor who as per SIPC is a “net winner” but is actually a “net loser” on an after-tax basis:

    Typical Investor Example:

    Original Investment: $1,000,000
    Withdrawals Over The Years: $1,750,000
    Gain or Net Winner (pre-tax): $750,000 (Withdrawals – Investment = New Winner)
    Taxes Paid Over The Years: $1,600,000
    Net Loser (after tax): $850,000 (Taxes Paid – Gain = Net Loser)

    A Madoff investment was considered a hybrid bond-type investment and produced all short-term gains and ordinary income. As a result, many investors would live off of the (theoretical) gains and pay taxes on those gains. To help pay taxes (and often living expenses), they would take withdrawals. Now trustee is potentially asking for all those gains back. This will surely bankrupt many individuals, all of which are already victims. Perhaps even more problematic is the situation charities find themselves. All the many charities have spent most of the fictitious income and don’t pay taxes. So they could be on the hook for massive clawbacks with no partially offsetting tax refund, which would put them “out of business”. All of this is framed around evidence that the SEC and FINRA were complicit and thus very much responsible for this fiasco – if not on the hook for investor lawsuits.

    Using the scenario above, this individual investor might have to pay back $750,000 in a claw back and be ineligible for the $500,000 SIPC insurance. This seems crazy as $850,000 was paid in taxes and some of the money was spent (e.g. a retiree). The investor then needs to get an income tax refund using a theft loss, among other avenues. Since this investor depended on the Madoff investment for much of his ongoing taxable income, he will have little ongoing future income to take full advantage of the $850,000 in tax loss write-offs and possibly to make good on the $750,000 clawback. So the bottom line is this investor (which will likely represent more than half of all the Madoff investors) not only loses initial investment and future profits on that lost investment, but has Trustee sue them for $750,000 and must fight with the IRS to get refunds to pay for the clawback; all of which will result in significant legal expenses for all parties involved and tremendous anguish. Its a mess and only the lawyers come out ahead. With Bayou Investments, a smaller, but similar case, almost 75% of all monies recovered from lawsuits and other activities were paid out in legal costs leaving investors with little.

    SIPC and Trustee have been vague and not forthcoming with information. This is understandable given the huge effort involved. But I think the time is now for them to answer key questions as many investors, including myself, are besides themselves thinking that they not only lost their investment but the Trustee is going to sue them as well (for money that was taken out to pay taxes). I see answers are needed to these and other key questions:

    – Is insurance for $100,000 vs. $500,000 for Madoff direct investors? Since it appears that there were not actual securities, SIPC could say they will only pay $100,000 for lost cash vs $500,000 for lost securities.
    – If you file for a claim, will this delay a 2008 IRS theft loss? If so, and if SIPC is limited to $100,000 it makes more sense for most investors not to file a claim. (Personally, this is my greatest reservation in filing a claim).
    – If you don’t file a claim, does this reduce your potential IRS theft write-off by $100,000 or $500,000?
    – What is the time frame for any clawback – 6 years? And what do investors do about taxes? Clearly, Trustee should not go after these innocent investors when the IRS owes them back taxes, which may exceed the clawback amount. And IRS shouldn’t limit tax amendments to 3 years if Trustee can go back and get profits over 6 years. Otherwise, the the IRS would be effectively stealing from the investor as well.
    – Does filing a claim inhibit investors rights in any way? There is talk that this would void a jury trial if Trustee were to come after investor in clawback scenario above.
    – If you don’t file a claim, will the clawback be reduced by the $100,000 or $500,000 SIPC insurance? Some investors who later get clawed back by Trustee won’t file a claim thinking they don’t have one, but find they do later if Trustee sues them.
    – If you are a net winner on a pre-tax basis are you eligible for SIPC payment? If you are a net loser on an after tax basis are you eligible for SIPC payment? If you are a net winner on an after-tax basis are you able to reduce any clawback by the SIPC amount?

    These answers are important, but, it seems to me an obvious and better solution is a tiered payback primarily funded by IRS tax refunds, investment-community-funded SIPC payments and in certain instances (such as charities) the US Government. It would save money for everyone. Investors would waive rights a) to any tax refunds, b) to funds obtained from the Madoff Securities estate, and c) to sue FINRA, SEC, IRS and investment community. The investment community (including newly regulated hedge funds) would pay higher premiums to SIPC – particularly the ones who sold Madoff investments in the first place. It could work something like this and be based on closing balance reflected in the 11/30/08 Madoff statement (excluding fictitious profits for 2008) and including a reduction of the principal balance based on likely losses in 2008 using an estimated hedge fund index loss, which was about 15%.

    $500,000 would get 95% back minus 15% loss or 81% or $403,750 ($203,000 SIPC, $200,00 IRS*)
    $1,000,000 would get 85% back minus 15% loss or 72% or $722,500 ($400,000 IRS*, $322,500 SIPC)
    $2,000,000 would get 75% back minus 15% loss or 64% or $1,275,000 ($800,000 IRS*, $475,000 SIPC)
    $3,000,000 would get 70% back minus 15% loss or 60% or $1,785,000 ($1,200,000 IRS*, $500,000 SIPC, $85,000 US Govt)

    … and so on with larger amounts getting a slightly lower percentage.

    Someone with a sensible approach (vs. a lawyer’s view) needs to step back and look at this and see that the road SIPC and the Trustee seem to be going down will be a long, costly one that will only result in unproductive and costly lawsuits (which will decimate estate’s assets), accounting headaches, and further hardship to investors and the investment community. And in this way, impacted investors will become productive, tax paying citizens once more.

    Note: IRS payments roughly equate to the 40% IRS would have to pay back anyway in a theft loss.

  2. The only approach for the victims would be class action so you are in court instead of arbitration. I don’t know how the bankruptcy court can claw back returns on investments that you relied on even though they were fraudulent, therefore they are ligitimate. The bankruptcy court can claw back illgotten gains but I believe you the victims should file suit in federal court to stop this improper action by the bankruptcy court.