Madoff Clawback Campaign Targets Ex-Clients

Whether it's adding insult to financial injury or a matter of fairness, hundreds of former investors in Bernard Madoff's bankrupt management firm may have to return as much as $735 million.

The trustee unwinding the confessed fraudster's massive Ponzi scheme has alerted 223 of Madoff's former clients to return any money they ever withdrew from the investment securities company. The letter could be a prelude to legal action to recoup dispersed funds and redistribute them to victims who lost everything, including their initial investments.

The letters, from trustee Irving H. Picard, of Baker & Hostetler law firm in Manhattan, went to clients who withdrew their money before Madoff admitted to running his vast Ponzi scheme where he used money from new investors to pay off old ones. Picard's targets are individuals, not funds that fed client investments to Madoff.

Picard said he is not trying to recoup money from clients who were "net losers," meaning they had deposited more money than they withdrew. Legally the trustee can recover money paid out then redistribute it proportionately to all the investors hurt in the scam -- and it's a procedure that has been used in prior investor fraud schemes.

"The purpose of the letter is not to threaten customers but to initiate discussion with them and hopefully each an amicable resolution," he said in a statement.

New York law only permits pursuing the return of assets -- principal as well as profit -- over the six years prior to the investment firm's bankruptcy in December.

Looming behind Picard's clawback letters is the threat that the former clients might be sued -- a prospect that is unlikely to sit well with those who were breathing a sigh of relief over their close escape from the collapse of Madoff's fake financial empire.

While Madoff sits in jail awaiting his June sentencing for the $65 billion rip-off, activity is swirling around his assets, including homes and boats. His investment securities company will be put up for sale at an April 27 auction; several potential buyers have submitted bid, including Castor Pollux Securities.

The sale's proceeds will go to defrauded investors. Some 8,000 have submitted claims. However, the $15 million or so expected from the sale (the amount of which will depend on gross revenue and shares traded through 2012) will be far from enough to cover investor losses.

The case is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC, 08-01789, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

by Elizabeth Olson