It will take a while for Bernie Madoff’s victims to get any money back, but most will probably get some eventually. Not all, and not soon, but some.
Victims won’t get much money back from their Madoff investment accounts, of course: The reason his $50 billion Ponzi scheme collapsed, he intimated, was that he only had $200-$300 million left. But they’ll likely get some from other parties.
Depending on how the investor invested with Madoff (directly or through another firm) and how much was lost, the victim might get anywhere from nothing to almost the entire investment.
Here are the top 6 sources that might end up compensating investors for Madoff’s fraud:
This one is guaranteed. Anyone invested with Madoff who paid taxes on capital gains will soon be filing for a tax refund. The “gains” didn’t actually exist. So it’s time to amend those past returns.
Big Banks and Financial Advisors
Anyone who invested with Bernie Madoff through a major financial firm will likely get a good chunk of money back. Not all of it, and a lot less of it after deducting legal fees, but a chunk of it. Why? Because these firms have hundreds of billions of dollars-worth of assets and vast global businesses, which gives attorneys plenty to go after. The firms also have brands and reputations to protect: If they tell their clients to get lost, this may damage their ability to win business in the future.
If the firms take a hard line, they might force all victims to go through individual arbitration cases, which is expensive and time-consuming. But given the size of the fraud, it would not be surprising if the firms were urged to enter into a settlement with a specific payout per victim (percentage of losses).
Among the big firms with $1+ billion Madoff exposure each are:
- Fortis Bank
- Union Bancaire Privee
Funds of Funds
Investors who rode the Madoff Ponzi train via funds-of-funds firms like Fairfield Greenwich, Tremont, Ascot, and others are in a weaker positionr. Most of these FOF firms are probably toast: It’s hard to believe suriving clients will not yank out the rest of their money, and anything left will be spent on legal fees. But the firms still have assets attorneys can go after, namely:
Fees paid to the firms and partners in prior years. These fees, it turns out, were paid on money that didn’t exist. There is precedent for Ponzi victims who got money out before the schemes collapsed being forced to give money to victims who didn’t get out (on the theory that the money they got back wasn’t really their money.) We don’t know of precedent whereby victims of financial fraud have been able to claw back fees paid to those responsible for investing in the fraud, but it certainly doesn’t seem far-fetched.
Big fund-of-funds firms that blew up clients with Madoff include:
- Fairfield Global Group
- Ascot (Ezra Merkin)
Securities Investor Protection Corporation
The SIPC, which insures registered brokerage accounts up to $500,000 (the FDIC for the brokerage industry), wants its protections to apply to Madoff’s victims. The SIPC is still investigating the mechanics of the fraud, but it is possible that individual Madoff investors might be able to recoup up to $500,000. It is not clear whether this would apply to investors who invested with Madoff through third-party firms.
Bernie Madoff and Family
Almost everything Bernie Madoff owns will likely be sold, and the proceeds will be used to settle government penalties and lawsuits. After the lawyers take their cut, this won’t amount to much (especially spread over $50 billion), but investors might get a few pennies. Madoff assets that might be subject to seizure/forfeiture include:
- Personal property
- Madoff Securities
This is a long shot, but given that the SEC is basically already admitted fault in the Madoff affair, we would not be surprised to see some enterprising attorney argue that victims should be compensated (not directly from the SEC–just via a general bailout plan). The government is handing out money to anyone who wants it these days, and there are still pots of cash to be allocated to ease the economic crisis. Perhaps Madoff’s victims will end up with some of it.