Madoff trustee files first clawback suit to recover funds from investors

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Investors who made money investing through Bernie Madoff could be facing a clawback lawsuit, which seeks to get back funds from investors who made withdrawals before the firm collapsed. According to the Wall Street Journal, the first lawsuit was filed by Madoff Trustee Irving Picard on Thursday. Picard seeks to get $150 million back from Vizcaya Partners, a Madoff investor based in the British Virgin Islands.

As I wrote in December, investors who made money with Madoff any time in the past six years could be at risk for such a lawsuit.

Picard is starting with the easier cases. Lawsuits involving funds withdrawn within 90 days are easier to make using the U.S. bankruptcy code. The suit filed against Vizcaya Partners and its bank, Gibraltar-based Banque Jacob Safra Ltd., asks for the return of funds that were withdrawn about six weeks before Madoff confessed to the Ponzi scheme. Vizcaya opened the account with Madoff in 2001 and used Banque Jacob Safra to wire $327 million to Madoff sometime before taking out $150 million in October. The Journal could not reach the bank or Vizcaya Partners for comment.

U.S. bankruptcy code allows Picard to sue investors for any fictional profits, plus the principal investment, that they withdrew anytime in the past six years. The reason these clawback provisions exist is that it's assumed that the money withdrawn involved cash paid into the Ponzi scheme by other investors who lost their money. Clawback provisions try to even up the losses.

These clawback lawsuits could go on for years and could involve investors who were direct clients of Madoff, as well as those who used feeder funds to invest through Madoff, called indirect investors. The cases against the indirect investors will be more difficult to prove. Picard must show that the money went from the Madoff firm through the feeder fund and to the investor. So it's likely Picard will first work on cases involving direct investors.

As part of his efforts to begin clawback lawsuits, Picard hired, or is seeking to hire, lawyers in Europe and other tax-friendly locales, such as Bermuda.

The bigger question in the minds of many who lost money is when will Picard seek to seize ill-gotten gains from Madoff's family members. Marc Hirschfield, a lawyer working with Picard, told the Journal that Picard could seek assets held by Peter Madoff, Bernie Madoff's brother, who also worked at the firm. Peter Madoff has not been charged with any wrongdoing, and Peter Madoff's attorney insists his client did not know about the fraud. Some of Ruth Madoff's assets have already been seized in the past few weeks.

Lita Epstein has written more than 25 books, including Reading Financial Reports for Dummies.

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