Should Madoff’s Winners Give Back to Losers?
By Josh Nathan-Kazis
Victims of Bernard Madoff appear to be deeply divided over the latest idea for recovering some of their lost money.
The court-appointed trustee for the liquidation of Madoff’s investment firm announced last month that he may attempt to get back some of those funds from charities that made a profit during the course of their investments with Madoff — an action federal law provides for on the principle that those “profits” came not from investments but from the accounts of other investors in the convicted Ponzi schemer’s fraudulent enterprise.
Madoff victim Steven Falk termed this news “horrible.” Falk, who said that he had approximately $340,000 in his Madoff account when the multibillion-dollar Ponzi scheme was revealed last December, added “That’s pointing victim at victim, and that’s not the point.”
Alan Goldstein, a 77-year-old retired owner of a New York textile company, was forced to sell his house when his Madoff investments disappeared. He and his wife moved to California to live in a one-bedroom apartment in their daughter’s house. Goldstein, who first invested with Madoff in 1997, said he understands that the money that charities withdrew beyond the value of their initial investments was theoretically his money, but he still doesn’t believe that they should be asked to return it.
“There’s also a lot of hedge funds and banks that took out a lot of money,” said Goldstein. “They did that for profit, they should be asked to return the money. The charities, they did that for good works, and they shouldn’t be asked to return a penny.”
That is a distinction Ken Gambon does not buy. “I lost more money than I could ever imagine,” with Madoff, said Gambon, 67. “I think the clawback is right for everybody. I think everybody suffered, and I think everybody should be treated equally. I’m a person who has given a lot to charity over the years and volunteered. I’m not anti-charity, [but] we’ve been devastated as a family. Our grandchildren don’t have their college fund anymore.”
The clashing views illustrated the moral complexity of the devastation Madoff left behind when his supposedly $60 billion investment enterprise, holding the accounts of tens of thousands of individuals, charities and for-profit enterprises, was revealed as a fraud.
An article September 1 by Bloomberg News reported that Irving Picard, the court-appointed trustee for the liquidation of Bernard L. Madoff Securities LLC, said that he might bring legal actions against charities that were “net winners” in the Madoff case, confirming earlier speculation by legal experts. These clawback suits would not require the trustee to prove that the charities had done anything wrong, but only that they had withdrawn more than they had invested from Madoff accounts. No such suits have yet been filed.
Of the major Jewish charities that had investments with Madoff and his feeder funds, only Hadassah, the women’s Zionist organization noted for building hospitals in Israel, is known to have withdrawn more than it invested from a Madoff account. Hadassah is reported to have withdrawn $90 million more than it invested from its Madoff account, although it is unknown how much of that money was withdrawn within the six-year New York State statute of limitations for clawbacks.
Yeshiva University, which did not respond to requests for comment, may also be at risk for clawbacks. The university’s initial investment of $14.5 million with Ezra Merkin’s Ascot Fund, which was invested indirectly with Madoff, had reached a purported value of $110 million by November 2008. The university has not responded to inquires about whether it withdrew an amount greater than its initial investment.
Bankruptcy lawyers reached for comment disagreed with those who would give the charities a pass. “Legally speaking, I’m not sure why that makes any difference in terms of who got the funds,” said Victor Bass, the chair of the bankruptcy department at Burns & Levinson. “If you were an individual who invested a million or a charity who invested a million, if you got a million and a half back you still got a half million of someone else’s money.”
Bass acknowledged, however, that the situation is fraught with challenges. “Trying to do what’s right and fair in a situation where everyone got ripped off and the money’s gone is just more difficult than normal,” he said.
While both Yeshiva University and Hadassah have substantial endowments that far exceed any amount they could be asked to return by the Madoff trustee, neither would identify steps the organizations had taken to reassure donors that new donations would not be used to pay off future clawback requests. Pamela Mann, a lawyer specializing in non-profit law and a former chief of the New York State Attorney General’s Charities Bureau, said that while unrestricted contributions could legally be used to pay a clawback, restricted contributions given by donors for specific purposes or projects would be exempt. “The law is pretty clear that restrictions on gifts would be respected by the bankruptcy court,” Mann said.
Bass agreed that restricted gifts would be exempt from a clawback by the Madoff trustee, but said that it would be a difficult strategy to apply to small donations. “The problem is that it’s cumbersome,” Bass said. “If the charity is soliciting $50 contributions from zillions of people, they’re not going to be able to dot i’s and cross t’s and adhere to all the formalities to ensure that those funds are protected.”
To further confuse the situation, some lawyers have brought a suit against Picard that they believe may undermine the legal rationale for clawbacks. A hearing has been scheduled for February to determine whether Picard has been using the appropriate formula to determine which Madoff investors are net losers and which are net winners. Picard has determined net equity by subtracting the amount invested in each Madoff account from the amount withdrawn from each Madoff account, but some argue that the net equity should simply be determined based on the last account statements Madoff sent to his investors.
Helen David Chaitman, a partner at Phillips Nizer and a Madoff victim herself, represents hundreds of other victims. She is among the lawyers who have brought the net equity lawsuit. She says that Picard’s definition of net equity is inconsistent with the definition laid out in the Securities Investor Protection Act, a 1970 federal law under which Picard was appointed.
Picard’s office did not respond to a request for comment.
What is clear is that there is a lot of litigation ahead, both for Picard and those challenging him. “We’re going to be watching this unfold for years to come,” Bass said.
Contact Josh Nathan Kazis at feedback@forward.com
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Allen Stanford and his Stanford international bank in Antigua,perpetrated his ponzi scheme via the sale of CD's.28,000 victims lost $7billion.Unlike Madoff SIPC refuses to offer coverage to the victims despite the parent company,Stanford finacial group who sold the CD's,is recognized by SEC and SIPC insured.The receiver is for claw-backs,the examiner and Antiguan receiver against it.Since Feb.2009,the court appointed receiver has filed for $29million in legal fees,$20million was approved.The victims have received nothing despite having almost $1billion in retrieved assets held by the receiver.The receivers are paid hourly hence drawing out the case under pretense that claw-backs benefits the victim is ludicrous.Legal fees are paid from our assets.In both cases the SEC was found negligent by their own inspector general,Kotz.They have taken a "who me'? approach and offer no compensation.Antigua is holding on to Stanford assets,while US wants control of its discovered assets,games people play.In the interim we victims had homes lost,are penniless,applied for food stamps,moved in with parents,lost tuition money,and declaring bankruptcy.With cash for clunkers,AIG,banks, etc their is no help for the victims.SEC was there to protect us it failed,tough luck "charley",fend for your self.Congressmen turn away,disinterested.and the beat goes on---DForester
I often think about this when going in for my Cancer treatments since Carl Shapiro is a major donator to the hospital and probably the biggest recipient of wealth from the Madoff debacle. There is also a brand new Shapiro wing at Brigham and Women's Hospital. Would there be a much progress in medicine in the Boston area without the ill-gotten Madoff money-it's an unknown.
I think the "winners" in the Madoff Ponzi scheme should only be allowed to keep that which they would have made had they put their money in a regular CD account instead, and the rest should be "clawed" back and redistributed among the losers. Allowing them to keep the ill-gained monies would be like allowing them to keep stolen merchandise.
Shame, shame, shame on any charity or non-profit that isn't scrambling to cooperate with the trustee. They are seeking to cleave unto stolen property. Once apprised of the nature of their 'returns,' they should begin sending money back to the trustee as fast as they can possibly identify those tainted monies. Instead, we see them hiring lawyers left and right, trying to retain these burgled goods. Shame, shame, shame. These directors, etc. need to really look at what they are doing and make amends and restitution immediately. Eventually, their names will be listed and their misdeeds revealed. Shame, shame, shame.
ה [ו] כבר תיקנו הגאונים לגבות בעל חוב מן המיטלטלין, ואפילו במלווה על פה; לפיכך חייבין לשלם בין אכלו בין לא אכלו, בין נתייאשו הבעלים בין לא נתייאשו, בין מן הקרקע בין מן המיטלטלין שהניח.
ו [ז] דין הלוקח מיטלטלין מן הגזלן, כלוקח מן הגנב: אם גזלן מפורסם הוא, לא עשו בו תקנת השוק. ואם אינו מפורסם, עשו בו תקנת השוק, ונותן הנגזל ללוקח דמים שנתן, ולוקח גזילתו; וחוזר ותובע הגזלן בדמי הגזילה. ואם כבר נתייאשו הבעלים--קנה לוקח עצמה של גזילה, ואינו מחזירה.
ז [ח] אסור ליהנות מן הגזלן; ואם היה מועט שלו--אף על פי שרוב ממונו גזול, מותר ליהנות ממנו עד שייוודע בוודאי שדבר זה גזול בידו.
ח [ט] בני אדם שחזקתן גזלנין, וחזקת כל ממונן מן הגזל מפני שמלאכתן גזלנות, כגון המוכסין והליסטין--אסור ליהנות מהן, שחזקת מאכל זה שהוא גזול; ואין מצרפין דינרים מן התיבה שלהן, שהכול בחזקת גזילה.
הלכות גניבה פרק ה א אסור לקנות מן הגנב החפץ שגנב, ועוון גדול הוא: שהרי מחזיק ידי עוברי עבירה, וגורם לו לגנוב גניבות אחרות, שאם לא ימצא לוקח, אינו גונב; ועל זה נאמר "חולק עם גנב, שונא נפשו" (משלי כט,כד).
ב הגונב ומכר, ולא נתייאשו הבעלים, ואחר כך הוכר הגנב, ובאו עדים שזה החפץ שמכרו פלוני זה הוא גנבו בפנינו--חוזר החפץ לבעליו, והבעלים נותנין ללוקח דמים ששקל לגנב מפני תקנת השוק; והבעלים חוזרין, ועושין דין עם הגנב. ואם גנב מפורסם הוא--לא עשו בו תקנת השוק, ואין הבעלים נותנין ללוקח כלום, אלא חוזר הלוקח ועושה דין עם הגנב, ומוציא ממנו דמים ששקל לו.
ג נתייאשו הבעלים מן הגניבה--בין שנתייאשו ואחר כך מכר הגנב, בין שנתייאשו אחר שמכר--קנה הלוקח בייאוש ושינוי רשות, ואינו מחזיר הגניבה עצמה לבעליה; אלא נותן להם הדמים, אם לקח מגנב מפורסם, או אינו נותן כלל לא חפץ ולא דמים מפני תקנת השוק, אם לא היה זה המוכר גנב מפורסם.
Madoff is considered a "well known" theif and as such market overt does not apply to the situation. Objective analysis indicates that Madoff's returns were "too good to be true" i.e. fishy. As such any "profits" pulled out are halachically considered to be benfitting from stolen property. It is halachically forbidden to benefit from stolen property. If YU keeps their "profits" from Madoff "investments", which are essentially funds that were taken from other unsuspecting investors including widows and orphans then they stand on the same moral ground as those Rabbis who would claim that it is halachically permissible to benefit from tax fraud. Sure, YU can find all sorts of Halachic reasoning that might justify their keeping the profits from their Madoff investments - but so can the Rabbis who would suggest that it is Halachically permissible to cheat non-Jews and/or commit tax fraud. The silence of the YU Roshei Yeshiva in this matter is astonishing - especially as some of them have been very vocal about the other issues I have mentioned. The YU Roshei Yeshiva should be doing exactly what Mark S. above has suggested - insisting that YU send back to the trustee every penny above their original Madoff investment (perhaps allowing for a CD return as suggested above) or at the very least setting up a charity fund with this money to be given to needy Madoff victims (poor penshioners, widows, orphans, hungry, etc.)
I wanted to add one more point - the payments Madoff made were not "technically owed" as Madoff did not make any real investments. Instead he committed fraud and stole other people's money to pay off earlier investors for their supposed profits. Yes stole - because he took the money under false pretenses. Even without getting into the secular legal issues of fraudulent conveyance - and the dictum of the "law of the land is the law" in Halacha may play some role in determining what is considered geneyva/gezeyla (theft)in Halacha (up to a point) - the fact is that the later investors had money stolen from them by Madoff and Madoff made payments of "profits" to earlier investors with these funds. THis isi benefitting from stolen property according to Jewish Law. YU rabbinical leaders that take salaries from this stolen money and do not decry YU's unwillingness to voluntarily "return" the "profits", simply have no leg to stand on when it comes to criticising other Rabbis for taking morally dubious positions on financial matters.
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