Did You Make Money in Madoff Investments? Well, Hand it Over

As if being a victim of the largest Wall Street swindle in history wasn’t enough, hundreds of investors who unwittingly profited from the massive investment scam run by disgraced money manager Bernard Madoff now have been ordered to return the funds, or else face legal action.

Irving Picard, the court-appointed trustee working to undo Madoff’s record-breaking, $65 billion Ponzi scheme, is seeking to recover about $735 million in false profits investors withdrew from their accounts in the six years before the scam was was uncovered.

So far, 223 former Madoff investors have received letters demanding return of money they received thinking the funds were profits from their investments. As it turned out, the funds were all part of Madoff’s Ponzi scheme, a type of illegal pyramid scheme in which early investors are paid purported profits taken from funds contributed by later investors.

Trustee Seeking Return of Millions in ‘False Profits’

Funds paid to Madoff investors must be returned so that they can put into a pool of money to be returned to all people who were defrauded and lost money in the scam, Picard said in the letters. Ripped off investors would then be compensated from the fund on a percentage basis determined by how much they lost in the scam.

“These amounts were paid to you at the expense of other customers while BLMIS was insolvent,” said one letter sent to an investor who withdrew a total of $975,000 between 2003 and 2008. “The Trustee demands that you immediately return such amounts to the Trustee for the benefit of all defrauded creditors.”

Investors who ignore the letter and refuse to fork over their Madoff profits – assuming they still have them laying around somewhere – could face legal action, the letters warned.

Clients who were “net losers” in the scam, meaning they gave Madoff more money than they ever received in false profits, are not expected to be forced to fork over the returns they were paid.

Some Plan to Challenge ‘Clawback’ Action

Such demands, also called “clawback actions,” are not unusual in cases of financial fraud. But in the case of Madoff, who is accused of ripping off tens of thousands of investors out of billions of dollars over nearly 20 years, the stakes involved are much higher.

Lawyers for some people who got a letter demanding return of their profits said they plan to fight the demand in court.

“The effect of these letters is to scare the living daylights out of people who have already been victimized once by Bernard Madoff,” said Jonathan Landers, a lawyer representing a large group of victims.

Some Madoff investors have already filed lawsuits seeking the return of income taxes they paid on purported profits they received on their investments. (We wonder if the government will be sending those funds back in cash, checks, or money orders. Yeah, right. Don’t hold your breath.)

So far, Picard says he has only been able to track down a fraction of the money Madoff is accused of swindling from clients.

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