Madoff Case Sparks Talk Of ‘Clawbacks’

Bernard Madoff

Bernard Madoff

BLOG UPDATE 2:19 P.M. EST (U.S.A.): La Tribune, a French business newspaper, is reporting that a founder of Access International Advisors, a hedge fund with large sums invested with Bernard Madoff, has been found dead in his New York City office building.

Rene-Thierry Magon de la Villehuchet, 65, was found this morning. The French newspaper called it a suicide, as have other media outlets, but the medical examiner hasn’t listed a cause of death.

Here, below, our earlier post . . .

In the CEP autosurf Ponzi scheme case, a court-appointed receiver filed dozens of lawsuits against program “winners,” forcing them to return profits on the theory there can be no winners in an illegal enterprise. The receiver, William F. Perkins, placed CEP in bankruptcy and then methodically went about the task of clawing back money for the estate.

Perkins, who effectively is running CEP as a debtor-in-possession, has negotiated settlements with a number of winners.

Last month he triumphed over CEP’s owners, Clayton Kimbrell and Trevor Reed, in a civil trial for fraud and breach of fidiciary duty.

Judge James E. Massey ordered Kimbrell and Reed to return about $1.5 million in fraudulent transfers they made to themselves, family members, employees and other CEP principals.

Some of the clawback cases against CEP winners still are being heard, about 17 months after the initial filing. More than 20 trials against individual defendants are scheduled next month in U.S. Bankruptcy Court in Atlanta.

CEP was declared a Ponzi by a federal judge, while Madoff remains an alleged Ponzi operator who told authoritites that the Ponzi could amount to $50 billion in losses.  The July 2007 SEC complaint against CEP said about $12 million flowed through the firm in an illegal securities offering.

Perkins maintains a CEP website from which visitors may access all the court documents. It’s well worth a visit.

Talk in the Madoff case has turned to what the court-appointed receiver might do to recover cash. Owing to the size of the alleged scheme, things could get downright ugly. In theory, people who made withdrawals could be ordered to return them — and this group includes individual investors, money managers and charities.

Lawyers are apt to use terms such as “fictitious profits” and “fraudulent conveyance” to describe redemptions by investors before the Ponzi collapse. The prospects are horrifying because investors didn’t know anything untoward was occurring behind the scenes, and many of them likely have spent all or part of the money.

See this Bloomberg News story.

If the case follows the CEP model, Madoff and insiders — if any — could be forced to return illegal transfers. Prior to his arrest, Madoff said he wanted to distribute up to $300 million to employees. If such transfers were made — recently or in years past in the form of bonuses — it’s possible that the money could be ordered returned even if spent.

Ugly doesn’t even begin to describe the battles that could ensue. Charities that relied on Madoff to manage money used for good deeds and took dedemptions could be targeted to pay the money back. There is the potential for pain in many, many places, and it’s possible the clawbacks could go back six years.

Blinded to the reality that Ponzi schemes can have devastasting consequences, some autosurf supporters still are arguing that the government has no business sticking its nose in where it doesn’t belong.

Incredibly, an autosurf whose launch is set for next year has targeted nonprofits in early promotions. Promoters have suggested it’s a great way to publicize the business and get cash flow.

AdSurfDaily, which has ceased to operate in the wake of the government’s August seizure of nearly $100 million, promoted at least one nonprofit, funding it with $100,000 in “ad packs” and asking members to contribute.

“ASD President, Andy Bowdoin, has generously donated 100,000 ad packages to this organization,” the ASD Breaking News site said on July 5, about a month prior to the seizure.

ASD encouraged members to send donations for the charity to ASD headquarters and even to transfer “donations from your [ASD] Cash Balance.”

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3 Responses to “Madoff Case Sparks Talk Of ‘Clawbacks’”

  1. The cornerstone of the government’s case against the CEP participants was a usage of bankruptcy law to recover payments, most of those claims were under the doctrines of insider payment and preferential payments and as good as Mr. Perkins has done, I really think he has left a lot of money on the table because of a few realities of the facts in that case. I really hate to criticize his efforts, he has done a fantastic job, but the fact that he hasn’t been able to pursue money overseas, set a floor that left a majority of the winners able to thumb their noses at him and settled the larger amounts on fairly generous terms disappoints me. Don’t get me wrong, he has so far done more than any other actions taken in the past, and he of course has no authority to bring criminal action, but I suspect the Secret Service and the Justice Department took the actions of the people in the CEP case into account when they took a very different type of legal action against ASD. I hope the government takes all of what happened and what many of the CEP investors did after the scheme was shut down into account before they settle with simply shutting down ASD and seizing the money. I’ve long maintained that in order to make clear to participants that their actions have real consequences there needs to be criminal prosecutions, not just of the operators but at the very least the high profile promoters who led so many more people to participate.
    No matter haw many operators you file charges, the fact remains that most of them are offshore and even though this provides no legal immunity the reality is the US is not going to pursue them all. When a few of the people brazen enough to run frauds on US soil, albeit with the claim of being “offshore” get sent to prison, the result will likely be that crooks will get smart enough to actually be offshore themselves, not just pay a few hundred dollars to file papers creating some paper corporation. This still leaves the most of the participants in the US, and until a few of this class of participants feels some pain they’ll continue to crow about what great investments these scams are.
    Look at the situation from the perspective of one of these ponzi pimps now. They can invest next to nothing, ring up thousands in referral commissions and run a cycle or two and begin taking profits out. As it is now the only thing they have at risk is their initial payment (often as little as $6!!!!) and the upside is incredible (a typical big time promoter can make $50,000 or more off that $6 payment in less than 60 days). Put a few of these guys very publicly in prison and maybe it’ll drive home the point enough to at least make a few of them think before they help someone they don’t even know and is safely in another country steal money online.

  2. Hi Gregg,

    In the early stages, it looks as though the Madoff case could go the CEP route, with a bankruptcy filing. Of course, the SIPC is trying to force a liquidation, and with all the competing interests and class-action lawsuits, there won’t be much money — if any — left in the Madoff pot.

    Key targets by investors will be companies that directed money at Madoff and charged clients a fee — presumably for due diligence — but not performing any meaningful due diligence. Madoff generated millions and millions of dollars for these firms, so it might have been easy enough to simply ignore fiduciary duty and gorge on fees.

    Perkins’ handling of the CEP case could emerge a template of sorts. There were claims early on that he missed promising areas of investigation, but the judge said Perkins turned over as many rocks as one could expect reasonably. He didn’t waste any time, either. The paperwork was flying within days and still is flying.

    I wasn’t aware that Perkins had had encountered difficulty chasing down overseas money, but I can see where it would be problematic. In the United States, at least, I know he encountered initial resistance from people who thought he was blowing smoke. It seems they take him seriously now.

    That’s the thing: People want to play these autosurf games, almost as though by force of will they can make it legal, and then stonewall when someone makes the claim it’s ill-gotten gain.

    Some of the ASD promoters gorged themselves on fees, and there even were reports about upline sponsors selling “ad packs” for cash. Heck, it it was that easy to do, who knows if sponsors didn’t discount the ad packs” to raise cash?

    Any receiver’s job in one of these cases is a difficult one. The task of unraveling the side deals alone poses a significant challenge. With the speed at which money moves around the world these days, the task grows ever more difficult.



  3. Good points Patrick. Honestly I’ve grown very cynical about the whole “industry” over the years, but it’s important for most people to realize that the online forums are a very myopic view of these scams and represent the “professionals” more than the innocent victims. Take a look at this one, ASD had somewhere between 70,000 and 100,000 members, but even before the government got involved never more than a 1000 -2000 were involved in the online discussions, most posts were made by less than 100 people. That leads me to believe that in fact the “typical” investor was someone pulled in via family, church or some other affinity fraud and the ones we see most of are the ones who in fact have few illusions and move from scam to scam, oblivious to the damage they do to others lives.