Post date: Dec 22, 2010 1:21:47 AM
Until the Bernie Madoff case, the term "claw back" wasvirtually unknown in the asset recovery world. Now it hasbecome a powerful tool for court appointed receivers and anightmare for victims who managed to independently recoversome of their investment. The Wikipedia definition is quitevague (forget finding the term in a conventionaldictionary): "Any recovery of a performance related paymentbased on discovery that the performance was not genuine."Until a few years ago, the last victims to invest in a Ponzior pyramid scheme had little chance of ever seeing any oftheir money. Those lucky enough to get in on the groundfloor of the scheme or who retained counsel early enoughwere the only ones to see any money.Classic Ponzi or pyramid schemes rely on an ever broadeningbase of new money coming in to pay old investors. Ultimatelythe scheme collapses under its own weight. The newestinvestors always lose. Until now.
U.S. courts are becoming increasingly sympathetic to efforts
to "claw back" some of the profits of earlier investors in
order to pay the newer investors. Unfortunately, the earlier
investors have often long ago spent those profits not knowing
they could be ordered to give back some of the money at some
future date.
Thus far, courts have been reluctant to allow clawbacks of
anything more than profits. By way of example, a person who
invested $100,000 and later cashed out his investment plus
$30,000 in interest might have to disgorge the interest. A
receiver could seek to have the court "claw back" any monies
received beyond the original $100,000 principal.
One federal judge in Pennsylvania found no legal prohibition
against clawing back any monies recovered. The government,
however, has a stated policy of not recovering principal
from innocent investors who cashed out early.
What does this mean for investors who decide to sue of
recover their investment losses? I recommend that any
"profits" or interest recovered in excess of the original
investment be segregated into a special account until all
filing deadlines have passed. Why? To insure that these
profits are available if a receiver is later appointed and a
court does order that profits be turned over.
With courts allowing claw backs, why would anyone want to
retain private counsel and recover their losses?
Unfortunately, the federal government has very limited
resources. Notwithstanding the extensive publicity that
often accompanies a new Ponzi scheme or fraud prosecution,
most fraudsters are not prosecuted. When the government does
step in, receivers must share whatever is collected with all
victims.
Fraud victims usually can get a much higher recovery by
being first to civilly prosecute a fraudster. Collect more
than your initial investment, however, and there is a chance
that you might have to share your "profits" with other
victims.
By waiting for the government to step in, there is a higher
risk of getting nothing or very little.
The case law on claw backs is very recent and in a state of
flux. Consult with a competent asset recovery lawyer before
spending any of your recovery.
About the Author:
Brian Mahany is a lawyer concentrating on asset recovery and
fraud recovery. He helps victims recover their money in a
wide variety of fraud cases including land fraud, securities
fraud, Ponzi schemes, fraudulent conveyances and judgment
recovery. He welcomes comments and questions, call him at
(414) 704-6731 or through his website,