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Legal Authority Blasts Proposed Clawbacks of Madoff Investors
Monday, 02 March 2009 06:59
by Sherwood Ross

The court-appointed Trustee overseeing the liquidation of swindler Bernard Madoff’s firm should certainly not “claw back” the monies received by Madoff’s innocent, unsuspecting investors who had no knowledge of the fraud, according to a Massachusetts law school dean. A claw back from innocent investors would compel them to repay what Madoff paid them and what most such investors, particularly retirees, have long since spent on living expenses.

“Innocent people should not be subject to clawbacks at all,” writes Lawrence Velvel, dean of the Massachusetts School of Law at Andover and a Madoff investor. Some of the defrauded investors in their mid- to late Seventies or Eighties, he writes, “who depended on Madoff monies to live, are now wiped out, may lose SIPC recovery because they took out more than they put in, don’t know where their next dollar will come from or how they will buy food.” Velvel asks, “You want to claw back money from people like this?”

SIPC is an acronym for Securities Investor Protection Corp., an agency that maintains a special reserve fund authorized by Congress to help investors at failed brokerage firms.

“Unless and until he changes his mind,” Velvel writes, “the Trustee (Irving Picard) apparently will not pledge to lay off small folks who are harmed, are innocent, and were withdrawing monies for understandable purposes like obtaining money to live, or to pay tax on the phony income that would not have arisen but for fantastic governmental negligence or complicity…”

Velvel gives as an example of such negligence the 1992 announcement by the Securities and Exchange Commission that it had investigated the Madoff situation and found no fraud. Such assurances prompted many people to invest in Madoff’s firm in the first place, and reassured those who had previously invested with him that their funds were secure.

The law school dean suggests that injured investors assert the principle of “equitable estoppel” to stop clawback efforts, and should bring declaratory judgment suits to head off any clawback actions by Picard. Under the doctrine of equitable estoppel, the government could not injure Madoff investors when the SEC, a government agency, was “a co-cause of the disaster that has befallen so many.” Declaratory judgments are used to prevent injury from actions that are almost certain to occur unless a court declares them illegal beforehand.

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“If the Trustee and SIPC do not quickly agree to reverse course and not take the kind of unjust actions under discussion, then I suggest injured investors bring declaratory judgment actions against them,” Velvel urged

In a related observation, Velvel writes “though lots of Wall Streeters knew or suspected that Madoff was a fraud” plenty of them “were making a boatload of money” off his operation by referring clients to him. Madoff gave investment managers four percent annually of the amount of money they had sent him, plus they charged one percent to the investors themselves and sometimes also 20 percent of the investors’ profits. Velvel writes:

“Lots of fund managers seem to have been bribed, in effect, to do no due diligence and to keep their mouths shut about deep-seated suspicions instead of blowing the whistle. …As coconspirators, or aiders and abettors, they would be liable to everyone whom (Madoff) injured, not just to the people who invested in (Madoff) through their institutions.”

Velvel made his comments on his blog, Velvel On National Affairs, on February 23, 2009. Velvel is dean and cofounder of the Massachusetts School of Law at Andover, purposefully founded in 1988 to provide a quality, affordable education to students from minority, immigrant, and low-income backgrounds who would otherwise be unable to obtain a legal education. He has been honored for his efforts by the National Law Journal and described as a leader in the effort to reform legal education by The National Jurist. Reach him at Velvel@VelvelOnNationalAffairs.com. Or 978-681-0800
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