Corporate Restructuring and Bankruptcy partner Philip Bentley co-authored the article "Madoff 'Redeemers' Are Not Yet in the Clear: Lawsuits to Claw Back Profits, and Even Principal, Are Likely," which appears in the January issue of Financier Worldwide.
The article focuses on possible lawsuits related to investors who pulled out of Bernard L. Madoff Investment Securities or related "feeder" funds before the alleged fraud was uncovered in December 2008. Madoff's trustee, based on U.S. Bankruptcy Code and the precedent set by the Bayou bankruptcy, will likely seek to recover preferential transfers - investors who redeemed within 90 before the bankruptcy, thereby benefiting them over those who did not - and fraudulent transfers. Those sued under fraudulent transfer claims would include those who made any profit off their investments with Madoff - they could be sued for those profits - and those who redeemed up to six years ago (2002) - they could be sued for the return of any profits and their principal. The latter finds its precedent in the court ruling in the Bayou bankruptcy case. In Bayou, also a Ponzi scheme, the court ruled that the trustee could sue redeemers as fraudulent transfer claims, even though investors had no knowledge of the fraud.
The authors also lay out possible legal arguments against any trustee claims, if the trustee opts to attempt recovery across the board using the Bayou ruling. Possible defenses include that the SEC and other sophisticated institutional investors did not uncover the fraud, so those who pulled out should not have been expected to. Another possible argument could be that the rulings in the Bayou case were wrong, and that investors in both cases had the legal right to withdraw their money. The article also touches on what non-US investors in Madoff could face.