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Should Investors Who Profited From Madoff Scheme Return Their Money?

This article was written by in Investing. 10 comments.

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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.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 10 comments… read them below or add one }

avatar 1 Anonymous

I would treat this the same as buying a TV out of the back of a van. If it’s stolen property, it’s stolen property, whether you were aware of that or not, and thus should be returned (hopefully with your money being returned as well).

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avatar 2 Anonymous

I saw the same story and I think it’s a tough call. They are recommending that those who did profit, lay low. If you came out ahead you should consider yourself lucky and not try to recoup phantom gains that never existed.

Also, I think this is different than buying a TV off the back of a truck, which has a high probability of being stolen. The too good to be true price gives it away. This is like buying the TV from Circuit City, you had no reason to suspect it was stolen.

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avatar 3 Anonymous

The phone call from regulators will ring sooner or later.

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avatar 4 Anonymous

I would consider all of the money in the fund as ‘stolen’ since it was given under false pretense. As such, when you are in possession of stolen property, you are required to give it back, regardless of the amount it originally cost. Keeping the stolen money is no better than what Mr. Madoff has done.

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avatar 5 Anonymous

I think I would give the money back and file a claim for the amount I originally invested. By keeping that money, they are ripping off other investors. Just because they are “victims” doesn’t give them the right to victimize other people further. And, aa is right. Sooner or later, the regulators will call. It’s probably better that they NOT have to call you.

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avatar 6 Anonymous

Say you bought a $20,000 car from a dealer who stole hem from other dealers. The thief was caught and the government made you return the car. But because the $20k you spent on the car was blown by the thief you get nothing.

Now who lost?

All that does is shift the loss from one victim to another. No way.

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avatar 7 Anonymous

Five words sum up how I feel about the investors – If you know, you owe.

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avatar 8 Anonymous

Its really more cut and dry than you think. Not only would I not submit that claim, but I would get ready to give back anything I made.

If you think, for one minute, that the Government will not go after people who profitted, you’re mistaken. They will do so just to get a small portion of the losses back, because it is one of the only places they can go to get these losses back for those who lost everything, including their initial investment.

There is almost no question that the ability to go back after previous investors that is maintained in a fraud ponzi scheme prosecution will be employed here… it almost always is. It is not a question of if those who profitted have to give back returns, but when…

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avatar 9 Anonymous

I would give the money back, because you really have no choice in that matter. Than I would file for tax refunds for all of the taxes I paid on the gains.

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avatar 10 Anonymous

one thing you are forgetting is those that may have profited (even not knowing it was a scam) dont keep these millions laying around. that money is most likely invested some where else. Granted they could make them sell the stocks (for this example) to give back the money. What if several profiting people invested in the same stocks. Now with those stocks being sold the price drops on that stock, hurting that company and its investors. So what the government would also have to look at is what cost to the economy would it be to get that money back?

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