Recovering Funds From Madoff Investors Not Easy

Bernard Madoff's victims are still hoping to get back some of the money from his Ponzi scheme. One way to do that would be for authorities to "claw back" gains that were paid out to early investors who actually made profits investing with Madoff, but that won't be easy.

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MICHELE NORRIS, host:

There are two kinds of Bernard Madoff investors - those who pulled out of his Ponzi scheme early and made a lot of money, and those who stayed in and lost their shirts. Now that Madoff is in jail, the two different groups may have to fight it out. NPR's Robert Smith reports.

ROBERT SMITH: You never hear the names of the people who got rips off of Bernie Madoff and there's a reason for that. They're scared - scared that the government is going to come after that money, using a legal remedy with an overly dramatic name.

(Soundbite of movie "Liar Liar")

Mr. JIM CARREY (Actor): (As Fletcher Reede) Oh yeah. It's the claw.

SMITH: The claw is more formally known as claw-back. Jim Carrey demonstrates.

(Soundbite of "Liar Liar")

Mr. CARREY: (As Fletcher Reede) Nothing can stop the claw.

Professor LYNN LOPUCKI (Professor of Law, UCLA): What claw-back is, is it's lawsuits to recover money from somebody that was paid to them.

SMITH: Lynn LoPucki says it's a common maneuver after a Ponzi scheme collapses. The UCLA law professor has seen it time and time again. The early investors profit, often unknowingly, from the later investors and those latecomers try to claw that money back. Sometimes it works, sometimes it doesn't. LoPucki says the people who earned the early money from Madoff may be innocent, but lawyers can make the case that they pulled their money out early because they smelled a rat.

Prof. LOPUCKI: And what the argument will very often be is there were signs here. You should've known. It'd be fairly easy now to make an argument that all of these investors should've known.

SMITH: Which puts investors in the strange legal situation of arguing essentially that they were stupid.

Prof. LOPUCKI: Yes. You want to get that said, but you don't want to say it too loudly.

SMITH: In the Madoff case, the court-appointed trustee has already said he will use the claw-back to go after those investors who pulled out more money than they put in, but as the movie "Toy Story" illustrated, the claw can go out of control.

(Soundbite of "Toy Story")

Unidentified Man #1: (As Alien #1) The Claw is our master.

Unidentified Man #2: (As Alien #2) The claw chooses who will go and who will stay.

Mr. TOM HANKS (Actor): (As Woody) This is ludicrous.

SMITH: And you haven't heard the half of it. You see, a claw-back doesn't just go after the rich - even people who've lost money with Madoff could be forced to pay. That's right. Victims against victims, because some people lost less than others - the claw-back can be used to pool money for all the victims. Professor LoPucki calls it…

Prof. LOPUCKI: Equalization even if you're equalizing among a bunch of losers.

SMITH: Now that's ridiculous. Brad Friedman is an attorney that represents more than 100 Madoff clients.

Mr. BRAD FRIEDMAN (Attorney): The claw-back money from victims is adding insult to injury, and moreover, I don't think it's justified or proper under the law.

SMITH: The law is confusing. There are different statutes for claw-back after fraud and for claw-back after bankruptcy. And there are various time frames under which you can recover the money - some laws say 90 days, others up to six years. And don't think you can go hide that money or play poor. Tamar Frankel, from Boston University Law School, says the claw can even go after those people who withdrew their money and already blew it on say their kids college education.

Professor TAMAR FRANKEL (Professor of Law, Boston University): Even if you spent it you may be liable.

SMITH: Even if you spent it.

Prof. FRANKEL: Sure.

SMITH: Even if it's gone.

Prof. FRANKEL: Even if it's gone. That is why I think this is a case for settlement, for negotiation and settlement.

SMITH: Otherwise, she says, it could take untold years of litigation to sort out the financial winners and losers and if that happens every victim will be asking the same question.

(Soundbite of "Toy Story")

Mr. TIM ALLEN (Actor): (As Buzz Lightyear) Who's in charge here?

Unidentified Group: The claw.

Robert Smith, NPR News, New York.

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