Clawbacks From "Madoff" Style Ponzi Schemes - Searching For Deep Pockets During Economic Uncertainty

Clawbacks From "Madoff" Style Ponzi Schemes - Searching For Deep Pockets During Economic Uncertainty

by Sidney Goldstein


With the first glimmer of a revival in the credit markets, many of us are quick to forget the tough lessons learned during the crisis period. One such lesson is the havoc that can be created by an aggrieved creditor's and in some instances a borrower's search for a "deep pocket" from which it can snatch victory or more precisely a recovery of at least some of its losses.

Needless to say, for each bad situation there is an inventive if not overly aggressive attorney with a theory to reverse his or her client's bad credit decision. This article will look in some detail at several such situations.

The first category deals with the attempt by a creditor taking unilateral action in an effort to obtain payment of its claim to the disadvantage of the other creditors.

Cash Money

Next, we examine the tactic of a borrower seeking to solve its dilemma as a defaulting borrower by attempting to turn the tables and blame the lender for its failure to renegotiate a defaulted loan.

Our main focus will be an examination of the continued bad luck of those unfortunates who entrusted Bernie Madoff and other "Ponzi" fraudsters with their life savings. Not only did many investors see their nest egg disappear (subject to a possible partial recovery under SIPA) but now find themselves defending a "clawback" claim of the Trustee seeking recovery of "phantom" profits or redemptions paid out of the funds invested by other duped investors. This is a bitter lesson that your enemy may very well be your co-loser. In this instance, the pockets of the targets are not very deep as they have already been picked. Finally, we will look at the extension of the clawback concept to other situations resulting in claims against so called "innocent parties."

Since the disclosure of the Madoff scheme, there have been a rash of other, but not as devious Ponzi schemes, brought to the attention of the authorities and the investment community, including, an unlikely husband and wife operation, which is now based in Tokyo, as reported by Reuters. Unfortunately, American investors tend to have a short term memory loss. A Wall Street Journal blog reported that just a year after getting burned... "the wealthy are piling back into" -- hedge funds and other costly alternative investments. In other words, Ponzi will rise from the past once again. Accordingly, investors and their advisors should read the Clawback portion of this article carefully. [footnotes omitted]

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Sidney S. Goldstein is a partner at McCarter & English, LLP, New York office. He is the author of Business Law Monograph, Loan Agreements (Volume G4) (Lexis Nexis Matthew Bender); "How to Help Clients Finance Businesses," 33 Practical Lawyer 25 (Sept. 1987); Co-Author, "Unsecured Creditors' Actions and Remedies in Bankruptcy and Insolvency Cases," Corporate Counseling (N.Y.S.B.A. 1988); Author, "Drafting a Security Agreement for an Offshore Borrower or Offshore Collateral" (2008); Contributing Editor, "Advising Small Businesses"; Lecturer, Credit Law, New York Institute of Credit; Vice Chairman, Banking Law Committee, General Practice Section, American Bar Association; Chair, Business, Corporate and Commercial Law Committee, General Practice Section, American Bar Association; Member, Business Law Section of the American Bar Association; Member, Banking Law Committees of the New York State Bar Association and New York County Lawyers' Association; New York State Bar Association Representative on the Tri-Bar Legal Opinion Committee; Advisor to Revised Article 5 (Letters of Credit) of the Uniform Commercial Code; Member of ABA Task Force on Revised Article 7 (Documents of Title) of the Uniform Commercial Code; Member of ABA Task Force on Deposit Account Control Agreements; Director of the Education Fund of the Commercial Finance Association; Member, Association of Commercial Finance Attorneys; and Member of the New York Bar.