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It may be true that everyone who invested with Bernard Madoff without knowing the extent of his scheme was a victim, but some investors have profited from Madoff’s plan. For example, assume an investor gave $1 million to be invested in Madoff’s fun in its earlier years. A few years later, but still early in the life of the pyramid scheme, the investor’s statement from Madoff might have valued the “investment” at $3 million. The investor decided he needed to cash out, collected the gain of $2 million, and left $1 million in the fund to earn more money.
A this point, there were enough new investors to pay for the occasional withdrawals of earlier investors. The gain of $2 million didn’t come from appreciation of an asset, simply deposits from new investors. Keep in mind I’m using fictional numbers here to illustrate the point. Let’s say that in March 2008, Madoff’s statement to this investor valued his portion of the fund at $5 million. This is still before investors discovered the fund was a pyramid scheme. Now, this $5 million is “lost.” The investor is considered a “victim” of Bernard Madoff, and victims are now filing with the Securities Investor Protection Corp. (SIPC) to get back the money they “lost” (up to $500,000).
Even though he didn’t know it scheme, this investor benefited from the pyramid scheme. He gave Madoff $1,000,000 and received $2,000,000 in return, without an underlying appreciation on an asset. This “victim” is actually came out ahead.
Lawyers are encouraging Madoff’s investors to do some math before filing a claim with SIPC.
“I had a call yesterday from a guy who said, ‘I’ve taken out more money then I originally put in, but I still had $1 million left with Madoff. Should I file a $1 million claim?’” said Steven Caruso, a New York attorney specializing in securities and investment fraud…
Jonathan Levitt, a New Jersey attorney who represents several former Madoff clients, said more than half of the victims who called his office looking for help have turned out to be people whose long-term profits exceeded their principal investment.
The courts can rule that investors who profited in the earlier days of the fund can be required to pay back these “profits.” But most, if not all, of these investors did nothing wrong other than not questioning the underlying investments of the fund and ignoring the secrecy shrouding Madoff’s investing techniques. These investors included public pension funds.
What would you do if you were an early investor who withdrew more than you invested and you believed you still had money invested in Bernard Madoff’s fund? Would you file a claim with the SIPC to receive as much $500,000 if your latest statement indicated you had more? Would you stay under the radar and not advertise to the SIPC that you profited from this mess?
Madoff ‘victims’ do math, realize they profited, David B. Caruso, Newsweek, January 8, 2009
Updated February 10, 2011 and originally published January 15, 2009. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @flexo on Twitter and visit our Facebook page for more updates.