Madoff Trustee Demands Feeder Fund Return Earlier Payouts

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Madoff Trustee Demands Feeder Fund Return Earlier Payouts


By Christopher Scinta, Linda Sandler and David Voreacos

April 24 (Bloomberg) -- The trustee liquidating Bernard Madoff’s defunct money management firm told one of its so-called feeder funds along with other investors to return payouts it got from the scheme, a spokesman for the fund said.

“We received correspondence from the trustee earlier this month,” said Thomas Mulligan, a spokesman for Fairfield Greenwich Group, one of the firms that funneled money to Madoff. He declined to comment further.

Irving Picard, the trustee, has told 223 investors to return as much as $735 million or face legal action, a person familiar with the matter said.

“The trustee demands that you immediately return such amounts to the trustee for the benefit of all defrauded creditors” of Bernard L. Madoff Investment Securities LLC, according to a copy of the letter obtained by Bloomberg News.

Picard mailed the so-called clawback letters to customers who redeemed investments over the past six years, the maximum period for which he can seek recovery under New York law, demanding 100 percent of the money paid out over that time, said Helen Chaitman, a Madoff investor and a lawyer with Phillips Nizer LLP who is advising 350 victims.

The letters went mostly to individuals, and constitute the bulk of expected clawback letters, said the person familiar with the mailing. So-called feeder funds, which gathered money in their own names and sent it to Madoff, got similar letters earlier, the person said.

Demand Contested

Andrew Levander, a lawyer for Ezra Merkin, managing partner of Gabriel Capital LP, which also put money with Madoff, didn’t return a call seeking comment.

Picard’s right to demand cash back is being contested by some lawyers, who say state law isn’t applicable. Money that Madoff sent back to investors was a payment of debt, not a withdrawal, so the trustee can reverse only 90 days of such transactions, according to victims’ lawyer Jonathan Landers of Milberg LLP.

Madoff, 70, pleaded guilty last month in Manhattan federal court to running the biggest Ponzi scheme ever, using $65 billion in real and artificial assets. Picard said he is unlikely to seek clawbacks from investors at the now-bankrupt firm who were unable to redeem their original investment.

“The purpose of the letter is not to threaten customers but to initiate discussion with them and hopefully reach an amicable resolution,” Picard said yesterday in an e-mail.

“We encourage recipients of the letters to contact us and provide us with information that we may not have that may be relevant to their receipt of the funds in question. We are not seeking to recover funds from customers who are ‘net losers,’ that is, people who had deposited more money” into their accounts than they withdrew, he said.

Legal Action

In the letter, dated April 17, Picard asserts through his counsel that the amounts received by investors “were paid to you at the expense of other customers” of the insolvent fund business. The trustee “has the job of recovering and paying out customer property,” and is “vested with powers to avoid transfers,” the letter said.

Failure to return the amount demanded could result in legal action, according to the letter. Investors who fail to return the money could be charged interest, the letter said. Those who believe they received the money “for value and in good faith” were invited to provide the trustee with a detailed explanation for that belief.

Nonprofits

Picard hasn’t excluded nonprofits from clawbacks, though he has said he will “consider” whether an investor is an individual or a nonprofit organization. Marc Hirschfield, a lawyer at Baker & Hostetler LLP, Picard’s employer and counsel in the Madoff assignment, declined to comment on whether any letters would be sent to nonprofits such as Hadassah, the women’s Zionist organization, which has said it took money out of the Madoff funds.

Nancy Falchuk, Hadassah’s president, couldn’t immediately be reached for comment yesterday.

Madoff victims include the Baltimore Police and Fire Pension Fund, Banco Santander SA, Boston philanthropist Carl Shapiro’s charitable foundation and Steven Spielberg’s Wunderkinder Foundation. Before the fraud came to light, Madoff told investors they had $65 billion in his firm’s accounts, prosecutors said. Madoff, awaiting sentencing in June, faces as many as 150 years in prison.

Baker lawyer John Moscow said he didn’t know whether Picard would pursue charitable organizations. The Wall Street Journal reported yesterday that Picard said that investors who had a net loss from Madoff’s funds wouldn’t be asked to return money.

So Sue Me

Landers of Milberg said Picard isn’t likely to get much money back in response to his letter, which lacks the force of law.

“The letter is of no legal or bankruptcy effect and there is no legal requirement that recipients respond,” Landers said. “To recover the funds, the trustee must bring a lawsuit. Our clients will fight hard against any attempt to claw back money.”

The Securities Investor Protection Corp., which hired Picard, previously said it has enough money to pay victims. SIPC has $1.6 billion in a fund designed to reimburse customers as much as $500,000 each on lost investments, plus $1 billion recovered by Picard from Madoff firm bank accounts and desk drawers, Stephen Harbeck, SIPC president, said in an interview last month.

Chaitman said Picard’s letters, sent to more than 10 of her clients, may be intended to stop people from putting in claims for SIPC insurance.

“I don’t anticipate that any of my clients will be writing Mr. Picard a check,” she said.

The letters shocked victims of Madoff’s fraud, according to Richard Friedman, an accountant from Jericho, New York, who entrusted almost $1.5 million to Madoff, he said.

“Finding out about Madoff was like getting stabbed in the back,” said Friedman, who hasn’t had a letter from Picard. “Receiving a clawback letter is like getting stabbed in the heart.”

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

To contact the reporters on this story: Christopher Scinta in U.S. Bankruptcy Court in New York at cscinta@bloomberg.net; David Voreacos in Newark, New Jersey, at dvoreacos@bloomberg.net; Linda Sandler in New York at lsandler@bloomberg.net.

Last Updated: April 24, 2009 00:01 EDT