Madoff Trustee Demands Investors Return $735 Million

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Madoff Trustee Demands Investors Return $735 Million
By Christopher Scinta, Linda Sandler and David Voreacos

April 23 (Bloomberg) -- The trustee liquidating Bernard Madoff’s defunct money management firm told 223 investors to return as much as $735 million or face legal action, said a person familiar with the matter.

“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.

Trustee Irving 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, according to the person. Picard contacted mostly individuals, not so-called feeder funds, the person said. The 223 letters constitute the bulk of expected clawback letters, according to the person.

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, was convicted last month in Manhattan federal court of 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.

Amicable Resolution

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

“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.

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.

Stab in the Heart

Landers of Milberg said Picard isn’t likely to get much money back in response to his letter.

“Our clients will fight hard against any attempt to claw back money,” he 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 Securities Investor Protection Corp., which is liquidating the Madoff brokerage, has 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.

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 23, 2009 11:43 EDT