Unlikely targets of Madoff claims
Santa Monica retiree Bob Braslau considers himself a victim of accused fraud mastermind Bernard L. Madoff.
But the court-appointed bankruptcy trustee, he fears, might consider him a beneficiary.
Braslau was among the thousands who lost money when the Madoff fund collapsed amid allegations that it was a $50-billion Ponzi scheme. But because Braslau had taken out some proceeds over the years, he could be forced to return those earnings if a court determines they weren’t real investment returns, simply money from other victims.
“I do feel in jeopardy,” said Braslau, a former aerospace engineer for TRW Inc. who invested with Madoff through Stanley Chais, a Beverly Hills money manager. “People are going to be frantic in trying to recover their money.”
Some of the charities and foundations that lost millions with Madoff are also potential targets in the gathering scramble to recover cash from those who profited to distribute among those who did not.
Madoff, 70, has been under house arrest at his luxury Manhattan apartment since Dec. 11. The former Nasdaq chairman is reported to be cooperating with investigators while awaiting trial on securities fraud charges.
Irving Picard, a partner with law firm Baker Hostetler appointed by the federal Bankruptcy Court to recover assets for distribution to defrauded investors, has so far found $830 million and sent out 8,000 letters to potential claimants.
In pursuit of other funds from the lost Madoff fortune, Picard is expected to employ a little-used legal tool, the “clawback” suit, to collect what remains of the alleged scheme’s payouts for a more equitable redistribution, analysts say.
The track record for clawbacks is limited because Ponzi scheme victims are typically left with little that can be recovered. Retrieving funds can also be difficult if those who profit take their proceeds abroad, where the trustee may have no jurisdiction.
But there have been successful efforts to recover money. After the Bayou Management hedge fund, run by Wall Street stalwarts Samuel Israel III and Daniel Marino, collapsed in 2005, the court-appointed receiver managed to recover about one-third of the $450 million lost by investors.
In another case, groups affiliated with the Church of Scientology agreed in 2006 to pay back $3.5 million they received from former Santa Barbara money manager Reed Slatkin and others who invested with him. Slatkin is set for release in 2014 from the U.S. penitentiary at Lompac, where he has been serving time in connection with a $593-million operation in which money from some investors was used to pay off others -- the classic definition of a Ponzi scheme.
“The legal basis for the trustees being able to clawback is the allegation that the transfer of any of the proceeds to anyone in a Ponzi scheme is a fraudulent conveyance,” said Bob Klueger, a Los Angeles attorney who specializes in asset protection.
“The theory behind it is that if it was a Ponzi scheme, the trustee is not bound by any considerations of who got in early and who got in late. The trustee is permitted to treat everyone the same, take back all money invested and divide it up evenly among all the investors,” Klueger said.
Klueger worked for two clients hit by clawback lawsuits for their role in funneling investment money to Slatkin. His clients settled with the bankruptcy trustee for an undisclosed amount that was returned to the pool of investors.
Most investors who suffered losses in Madoff’s scheme, both individuals and institutions, didn’t deal directly with the New York magnate, instead putting their money in through feeder funds such as Brighton Co., which was run by Chais, a Beverly Hills investor and philanthropist. The founder of the Chais Family Foundation, a contributor to Jewish causes around the world, Chais is the target of a $250-million civil suit and has folded the foundation for lack of funds.
Investments that were structured as part of retirement plans are exempt from clawback lawsuits, legal experts note, but that is of little comfort to Braslau. He was simply an investor, and he feels exposed.
He declined to say how much he lost but said it was more than he took out over the 30-plus years he was invested. He does not blame Chais, however, saying he was “99.99% convinced” that Chais knew nothing about Madoff’s corrupt dealings, given that Chais was providing money from friends, relatives and charitable groups.
Chais did not return phone messages from The Times.
Joe Grundfest, a Stanford University securities law professor, predicted complex and controversial legal actions among the Madoff victims, including charitable foundations with considerable assets that could be tapped and thousands who counted on the fund’s proceeds to support them in old age.
“You can imagine that litigation of that sort gives rise to many potential problems and appearances of harshness,” said Grundfest, raising the prospect of charities that used investment proceeds for humanitarian causes being hit with demands for the return of money already spent. “It’s going to be hotly litigated.”
In New York, Atty. Gen. Andrew Cuomo has already signaled that such investors are under scrutiny. He has served subpoenas on at least a dozen universities and nonprofits that took investment advice from Madoff intermediary J. Ezra Merkin.
“Anything withdrawn within 90 days of the bankruptcy filing most certainly would be targeted,” said Donald Chase, a securities litigator who represents clients who consider themselves Madoff victims. “Beyond that, what everyone is bracing for, if you take the Bayou case as an example and blueprint, is the trustee filing claims against anyone who redeemed or received profits in the last six years.”
A primary residence is fully protected from bankruptcy seizure in a few states, such as Florida and Texas, but in California the homestead exemption is only $75,000 per couple under 65 and $200,000 for those at or above retirement age.
The statute of limitations in most states for recovering fraudulent redemptions is six years, four in California. But lawyers warn that the statutes are often ambiguous, neither clear nor consistent about when the clock begins running.
Others who could be sued for return of allegedly ill-gotten gains include executives of now-bankrupt funds who drew exorbitant salaries or severance packages even as the portfolios they were managing were sliding.
“People are entitled to get paid for their work. But golden parachutes are different,” Los Angeles bankruptcy attorney Arthur Greenberg said. “If you’ve got just a plain fraudster, the answer is he’s going to be giving back what he took from the estate.”
Reed Kathrein, a Berkeley securities litigator, said he had his doubts that the bankruptcy trustee in the Madoff case would target victims such as Braslau with clawback suits.
“Certainly, if they try to come back after people like that, there’s going to be a massive revolt and a big fight,” said Kathrein, noting that even some who came out ahead were unwitting victims.
“You can only squeeze so much blood out of a stone.”