That headline appeared in ‘USA Today’ on April 23, 2009.
In short, according to the article, some of Bernard Madoff’s clients have received legal requests to give back the money they withdrew before the financial scam collapsed. That fact alone has made a lot of folks understandably very angry.
The court appointed trustee who has the job of recovering assets for Madoff’s victims, has sent an estimated 200 letters seeking a return of funds investors withdrew prior to the collapse of the scheme.
Seems that under New York state law, court trustees can seek recovery of withdrawals for up to 6 years, a provision of the law that’s known as a ‘clawback procedure’. The legal theory behind the clawback procedure is if withdrawals were paid from a financial scam, they should be returned proportionately and then redistributed among all victimized investors.
Legally speaking, that may make sense, but practically speaking it’s got some problems.
Under the clawback rules, if an investor withdrew $100,000 to pay for college tuition for a child or grandchild and then subsequently lost everything else due to the fact that it was invested with Madoff, that same investor may be forced, legally, to have to come up with $100,000.
Think this sounds beyond the realm of the possible?
Think again.
In 2005, a case involving Bayou Management, a hedge fund that collapsed from fraud, had the court appointed trustee recovering millions of dollars by waging clawback lawsuits.
As unfair as that may seem, it’s the law.
So what steps can you take to protect yourself? How can you help keep yourself from being a fraud victim?
Make sure you know where your funds are custodied. A custodian is an agent, bank, trust company or other organization which holds and safeguards an individual’s investment assets. And ideally make sure the custodian of your funds is someone different than your money manager. For example, if your funds are custodied, or held with one brokerage company or clearing firm and managed by a different firm, you’ve improved your odds of not being a victim. But, don’t stop asking questions there. Know what the relationship is between your money manager and custodian and be certain to read thoroughly all disclosure documents relating to your custodian and your money manager.
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