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Madoff Victims: The Worse is Yet to Come
Julianne Frank All rights Reserved
February ©2009
As a bankruptcy lawyer, I have seen many clients fall prey to Ponzi schemes.
One of my elderly friends, well into his retirement years, is a victim of the Bernie Madoff scandal. Most of his life savings, about $1 million, has vanished in the blink of eye.
Much of our recent time together has involved my attempts to comfort him. I tell him of past clients, other victims of Ponzi schemes, who have managed to recover at least some portion of their investments. Trying to find his own version of a silver lining, my friend consoles himself with the fact that in the almost 30 years of his relationship with Madoff, he consistently received quarterly payments, the apparent returns well exceeding his investment.
Not wanting to shed further rain on his already dark-clouded parade, I did not want to tell him that it is these very returns that are likely to make his problem worse-- – – much worse.
What my friend does not realize is that sometime in the not too distant future, he, like many of Madoff’s innocent victims, are likely to receive a demand letter from the federal government mandating that they hand over most of the payments he received in the last few years. If he does not comply, the Government will be in a position to take away many of his remaining assets.
Why is this so and how is it possible? Haven’t these victims suffered enough?
The answer is rooted in federal bankruptcy law. The investigating authorities are likely to place one or more of the Madoff entities into an involuntary bankruptcy. The reason for this is the breadth of the power that is wielded by bankruptcy trustees, and the arsenal of weaponry afforded to them.
Among these weapons is a right to pursue what is known as “preference recovery”. Preference law proclaims that certain creditors who have been paid back some of what is owed to them must give back the monies. These laws are designed to maximize the “pool” of funds so that they can be distributed more proportionately to all creditors–not just those who received some monies in recent days.
Furthermore, the Bankruptcy Code allows a trustee to utilize state fraudulent transfer laws to recover assets. Most states have adopted some form of the Uniform Fraudulent Transfer Act. This allows recovery of assets even if there has been no fraudulent intent manifested in the act of distributing those assets. For example, if assets were paid out when the entity was insolvent, those distributions are deemed fraudulent even if the entity meant well–and even if the recipient is an innocent player. Again, the idea is to create the largest possible recovery fund to be shared by all.
Is there is still time to protect my friend’s remaining assets? Maybe. But he is now in what I call the “yellow zone”of asset protection planning. This is to be distinguished from the “Green zone”, where your world is safe and you have no known imminent threat of creditor attack, and where asset protection planning can be very effective. It is also less precarious than asset planning in the “red zone”, where your creditors have already let you know that they are coming and where asset protection planning may well be futile. Asset protection planning in the “yellow zone”, where you expect attack but it has not already shown up, is a risky venture at best. However, it may be justified in the face of the alternative, which is to do nothing and simply roll the dice. Even inefficient asset protection planning can instill some hope to bleak prospects.
The Madoff fiasco is a crystal clear example of how you can be financially blindsided in this world. It is the perfect lesson for why your eggs should be spread among many baskets, no matter how secure any of those baskets may seem. And it is the poster child for proper, prophylactic asset protection planning.
May you have a financially secure New Year.
Julianne RETURN TO "INSIGHTS"
Julianne Frank All rights Reserved
February ©2009
As a bankruptcy lawyer, I have seen many clients fall prey to Ponzi schemes.
One of my elderly friends, well into his retirement years, is a victim of the Bernie Madoff scandal. Most of his life savings, about $1 million, has vanished in the blink of eye.
Much of our recent time together has involved my attempts to comfort him. I tell him of past clients, other victims of Ponzi schemes, who have managed to recover at least some portion of their investments. Trying to find his own version of a silver lining, my friend consoles himself with the fact that in the almost 30 years of his relationship with Madoff, he consistently received quarterly payments, the apparent returns well exceeding his investment.
Not wanting to shed further rain on his already dark-clouded parade, I did not want to tell him that it is these very returns that are likely to make his problem worse-- – – much worse.
What my friend does not realize is that sometime in the not too distant future, he, like many of Madoff’s innocent victims, are likely to receive a demand letter from the federal government mandating that they hand over most of the payments he received in the last few years. If he does not comply, the Government will be in a position to take away many of his remaining assets.
Why is this so and how is it possible? Haven’t these victims suffered enough?
The answer is rooted in federal bankruptcy law. The investigating authorities are likely to place one or more of the Madoff entities into an involuntary bankruptcy. The reason for this is the breadth of the power that is wielded by bankruptcy trustees, and the arsenal of weaponry afforded to them.
Among these weapons is a right to pursue what is known as “preference recovery”. Preference law proclaims that certain creditors who have been paid back some of what is owed to them must give back the monies. These laws are designed to maximize the “pool” of funds so that they can be distributed more proportionately to all creditors–not just those who received some monies in recent days.
Furthermore, the Bankruptcy Code allows a trustee to utilize state fraudulent transfer laws to recover assets. Most states have adopted some form of the Uniform Fraudulent Transfer Act. This allows recovery of assets even if there has been no fraudulent intent manifested in the act of distributing those assets. For example, if assets were paid out when the entity was insolvent, those distributions are deemed fraudulent even if the entity meant well–and even if the recipient is an innocent player. Again, the idea is to create the largest possible recovery fund to be shared by all.
Is there is still time to protect my friend’s remaining assets? Maybe. But he is now in what I call the “yellow zone”of asset protection planning. This is to be distinguished from the “Green zone”, where your world is safe and you have no known imminent threat of creditor attack, and where asset protection planning can be very effective. It is also less precarious than asset planning in the “red zone”, where your creditors have already let you know that they are coming and where asset protection planning may well be futile. Asset protection planning in the “yellow zone”, where you expect attack but it has not already shown up, is a risky venture at best. However, it may be justified in the face of the alternative, which is to do nothing and simply roll the dice. Even inefficient asset protection planning can instill some hope to bleak prospects.
The Madoff fiasco is a crystal clear example of how you can be financially blindsided in this world. It is the perfect lesson for why your eggs should be spread among many baskets, no matter how secure any of those baskets may seem. And it is the poster child for proper, prophylactic asset protection planning.
May you have a financially secure New Year.
Julianne RETURN TO "INSIGHTS"