As reported in the Daily Business Review
By John Pacenti
From New York to Florida, lawyers who represent aggrieved investors plan to use an elephant gun to recover any assets for victims of the massive alleged Ponzi scheme masterminded by Bernard Madoff, the fallen Wall Street wizard and former Nasdaq chairman who is accused of bilking hedge funds, wealthy investors and charities out of $50 billion.
Some firms, like Miami-based Adorno & Yoss and Greenberg Traurig and Tampa-based Holland & Knight, have formed dedicated teams to explore every opportunity to recover money for victims.
“The avenues that investors and clients are going to be looking at with the guidance of firms like ours and these practice groups are investment advisers, accounting firms, the insurance companies, the feeder firms,” said attorney Jan Douglas Atlas, a partner and head of the securities litigation team for Adorno & Yoss in Fort Lauderdale.
“All of these different avenues are going to be looked at, and there is going to be a lot of problems along the way.”
What type of problems?
To pursue any money directly associated with Madoff, individual investors are going to have get in line among his creditors as the court-appointed receiver in New York takes what’s left of Madoff’s business into bankruptcy.
There is also the issue of the Securities Investor Protection Corp., which insures brokerage accounts up to $500,000. Many investors will find little solace there.
“If I understand correctly, there is a cap on the total value within that program, and I believe it’s around $1.5 billion,” Atlas said. “And if that information we are getting is correct, that the Madoff debacle is going to be in the vicinity $50 billion, the SIPC fund is obviously not going to be sufficient.”
There are also qualifications requirements, and claims with the SIPC can be a drawn-out process, he said.
“So, although it’s fortunate for many investors that the SIPC program is in existence, to the extent that anyone believes that’s going to be a sure-fire way of getting their money back, there are a lot more steps involved,” Atlas said.
Accountants will be busy
Another significant problem on the horizon is taxes.
Those who got wiped out and may receive money from the SIPC may face some complex tax issues. There are tax implications for those who might be forced to return profits made with Madoff, depending on when they received distributions and if it can be established the profit occurred after Madoff because of the alleged scam.
“If all of these monies were in essence ill-gotten gains and the result of illegal activity, it’s going to manifest itself from a tax perspective in ways that are somewhat unique,” Atlas said. “People are going to claim refunds for taxes they already paid and others are going to want to claim tax deductions based on theft losses.”
Morrison Brown Argiz & Farra, the largest independent CPA firm in Florida, announced it formed a special task force last week to examine Madoff ramifications after an onslaught of calls from attorneys, bankers and investors affected by the scheme.
Attorney Harley Tropin, a partner with the Coral Gables law firm Kozyak Tropin & Throckmorton, was the trustee and receiver when the South Florida-based grocery diverting firm of Premium Sales collapsed in the early 1990s. At the time, Premium, which purported to make huge profits by reselling low-priced groceries to other markets, was considered to be one of the largest Ponzi schemes ever at $250 million.
Tropin ended up getting 62 cents on the dollar after expenses and fees for the victims of Premium.
He said the receiver in the Madoff case – Lee Richards, an attorney at Richards Kibbe & Orbe in New York – will take a month to gather information and make sure documents are not destroyed. He will cooperate with law enforcement in locating witnesses and try, if possible, to allay investors’ concerns. He will start working with lawyers for investors to determine what investor funds he will sue. He will then go after those who made money with Madoff to create a pool that will be dispersed to creditors and victims.
“The receiver and trustee will try to make that as fair and equitable and try not to do more injury to people already injured,” Tropin said.
Madoff’s Ponzi or pyramid scheme might have been massive and might have fooled the U.S. Securities and Exchange Commission, but it worked like any other. It took money from new investors to pay established players.
It collapsed when the inflow of money slowed as the nation’s economy worsened. Madoff, a New York resident who maintained a residence and strong social ties in South Florida, got at least some of his money in what is called an affinity scam, by tapping into the wealthy Jewish enclave on the island of Palm Beach.
An affinity scam needs someone who is trusted in a close-knit community, and it appears Madoff found one in well-regarded Palm Beacher Carl Shapiro, who made his millions in textiles. Shapiro entrusted his fortune and the assets of his charity to Madoff, a long-time friend.
Shapiro has been closed lipped, granting an interview only to the local society newspaper in Palm Beach. But his spokeswoman issued a statement last week saying that Shapiro never solicited or recruited clients for Madoff. “People would approach him because of the close relationship, asking for an introduction to Mr. Madoff,” according to spokeswoman Carey O’Donnell.
Shapiro shouldn’t have any liability, said Curt Miner, an attorney for Colson Hicks Eidson in Coral Gables. The firm represents Norman Braman, the Miami luxury-car dealer and former Philadelphia Eagles owner who lost money in the scam.
“If my buddy down the street or at the club says this guy is a great, you should check him out, he doesn’t owe any fiduciary duty. I’m not going to have recourse against him,” Miner said.
One of the first lawsuits in the $50 billion fraud case against Madoff emerged Friday. The suit, which seeks class action status, was filed by a Long Island, N.Y., investor who claims he lost $3 million.
Miner said he doesn’t think the Madoff litigation will include much class action work, which makes more sense when there are numerous victims with relatively small claims.
“Here, you have people who lost enormous amounts. You have victims like hedge funds and foundations,” Miner said. “They are not going to be part of a class action.”
Colson Hicks Eidson is very familiar with taking large roles in sifting through the wreckage of massive scams.
It represented victims of Premium Sales. Roberto Martinez, a former U.S. attorney for the Southern District of Florida and now a partner at the firm, w as receiver for the Securities and Exchange Commission in the $830 million collapse of Mutual Benefits in 2004 – another Ponzi scheme that gambled wrongly on when terminally ill people would die.
Martinez said all significant recovery of funds will come on the civil receivership end and not the criminal prosecution. The principals in the Mutual Benefits case, for instance, have yet to be charged, and so no criminal forfeiture action has been pursued by the government. In the Premium case very little money came back to victims from the criminal forfeiture.
But as a former prosecutor, what floors Martinez is that Madoff – who he describes as “evil” – is not behind bars. Madoff, 70, was under limited house arrest, released on $10 million bail late last week.
Madoff’s reported cooperation with federal investigators is not reason enough to allow him out of custody, Martinez said.
“He is a flight risk. I think he is a risk of destroying of evidence,” Martinez said. “Based on everything this guy has done over decades, he couldn’t have been acting alone. Obviously, he lied about who he was. How could you trust him now?”
Janice Oh, spokeswoman for the U.S. attorney’s office in New York, which is prosecuting the case, would not comment on why Madoff was allowed to post bond.
The SEC has come under heavy criticism for not acting on allegations of fraud in Madoff’s investment company dating back to 1999. A federal judge on Friday extended an order that freezes Madoff’s assets, placing everything – artwork, cars, jewelry, property – into the hands of a court-appointed receiver.
Legal targets
Those who do appear in the bull’s-eye for attorneys are the feeder funds and the financial advisers who ended up putting all their clients’ eggs in the Madoff basket.
Some hedge funds, like New York-based Ascot Partners, inexplicably had most of its $1.8 billion in assets invested with Madoff.
“There are a lot of smaller investment advisers, and we have a number of them in our area, that had relationships with wealthy individuals and those funds were targeted toward the Madoff programs,” Atlas said. “What we are coming across is the situation where an investment adviser may have put a disproportionate percentage of a family’s assets into the Madoff fund.”
An investment adviser could be liable on any number of issues, especially if he concentrated a client’s assets with Madoff.
“There will be issues regarding whether or not the investments turned out to be suitable, whether or not the disclosures were made, whether due diligence was performed with respect to the Madoff funds, whether there was proper diversification in some of these accounts,” Atlas said.
West Palm Beach attorney Joe Osborne of Babbitt Johnson Osborne & LeClainche said in some cases people who put money into feeder funds may have had no idea their money was then invested with Madoff.
“It was kind of a don’t ask, don’t tell theory,” Osborne said. Neither regulators nor institutional investors raised questions because Madoff’s operation was producing solid returns and as long as investors were getting those returns, no one wanted to rock the boat, he said.
“It’s just a very strange situation that no one knew what was going on besides Madoff,” he said.
One caveat is that a lot of brokerage accounts have a stipulation that any dispute needs to go through binding arbitration. That provision may be hard to sustain by firms who lost client money to Madoff.
“If the arbitration provision was induced by fraud then it would be unenforceable,” said Miami attorney Mark Tepper, who specializes in securities disputes in arbitration.
Also, insurance companies could be on the hook if they issued policies to financial advisers as a sort of malpractice policy, said Atlas of Adorno & Yoss.
Some lawyers, such as the high-profile New York attorney Barry Slotnick, said their elephant gun will be indiscriminate.
Slotnick, who defended New York subway vigilante Bernard Goetz, said he will be filing lawsuits in a number of venues, including Florida. He said people such as Shapiro may not be immune to litigation.
Slotnick was in Palm Beach last week speaking with prospective clients, telling them he has a unique strategy that will allow them to regain lost dollars.
“I have been running into people on the streets listening to tell them their tale of woe,” Slotnick said. “I personally will be handling it. I think its one of the worst frauds I ever heard of. This man has stolen from his friends. He has destroyed lives. We will go after him with all the power that we possibly have.”
Meanwhile, those whose finances have been devastated in the Madoff collapse have been cashing in insurance policies, said Richard S. Bernstein, a Palm Beach insurance adviser to the wealthy and charities.
“I’m assuming people are selling their policies to recapture some money,” Bernstein said. “A lot of people need the cash.”
Bernstein said he is also hearing of charities that invested with Madoff are going to close their doors. They will be looking to file litigation, attorneys said.
Atlas said it’s important not to forget the human element and historical significance in the Madoff scandal. He said securities and tax law will evolve for years to come because of the Madoff scandal. But for too many, the scam coupled with the rotten economy is devastating.
“This is a terrible, terribly sad story,” Atlas said. “Families just have been decimated financially with what has occurred here. To me that is the real story. The real story is the sadness that so many people at the downside of the bell curve of their life are finding themselves in a situation they never expected to after years and years and years of hard work.”
Daily Business Review staff writer Bud Newman contributed to this report.