Legal News

How Will the Trustee in the Madoff Case Return Investors Their Money?

By Dan Slater

What with Marc Dreier and Bernie Madoff, we’ve been hearing a lot about receivers and trustees lately.

As we’ve noted, Paul Weiss’s Mark Pomerantz (Harvard, Michigan Law) was assigned to be the receiver in the Dreier case, while Richards Kibbe & Orbe’s Lee Richards (Amherst, Columbia Law) is the receiver in the Madoff case, with Gibbons’s Irving Picard (UPenn, Boston U. Law) being assigned the trustee. Picard (pictured), according to a recent order by Southern District of New York Judge Louis Stanton, is responsible for the liquidation of Bernard L. Madoff Investment Securities LLC, with all the duties and powers as prescribed in the Securities Investor Protection Act of 1970.

With the Dreier-related losses alleged to be $380 million and the Madoff Ponzi scheme believed to amount to $50 billion, we couldn’t help but wonder: Just what the heck do these receivers and trustees do?

So we rang up Jeff Marwil, the Chicago-based co-head of Winston & Strawn’s restructuring group. Marwil has been busy as the receiver on the Bayou hedge fund fraud, and has reportedly recovered millions of dollars for defrauded investors in the case.

Hi Jeff, thanks for speaking with us. What’s the difference between a receiver and a trustee?

A receiver is appointed under the federal receivership statute and has pretty broad responsibilities. The trustee has a more defined role under the bankruptcy statute.

So what exactly is the receiver in the Madoff case doing?

He’ll be looking to investigate and pursue causes of action in order to get recoveries for defrauded investors. He’ll look to recover redemptions to see if any of the fictitious profit should be redistributed.

How does the alleged Madoff fraud compare to the Bayou fraud?

The legal theories will be roughly the same as in Bayou. In Bayou, we obtained recovery from former investors for the benefit of defrauded investors so that both groups share equally in the harm caused by the fraud. That’s the claw-back principle.

Can you explain that a bit?

It may turn out that actions against former investors will conclude that some of them did find out about the fraud and that’s why they redeemed. If you were taking your money out because you knew of the fraud, then you lose the good faith defense and you wouldn’t be allowed to keep the invested principle. You’d have to give it back and stand in line with everyone else. In other words, if you didn’t act in good faith when you took your money out then you’re not allowed to do better than everyone else.

You must share the pain.

Yes. The policy is an answer to human nature, which is often that, ‘Hey, I’m going take my money and just wait until someone comes after me.’

OK, thanks Jeff.

Sure.

Full post as published by Law Blog - WSJ.com on December 17, 2008 (boomark / email).