Stakeholders in the Madoff Scandal and Their Need to Act Promptly and Proactively – Indirect Stakeholders – Installment 9

May 26, 2009Articles White Collar Defense & Compliance Blog

This is the ninth in a series of installments on this blog that is discussing some of the issues that face the manifold stakeholders that have been materially affected by the long global Ponzi scheme of Bernard L. Madoff. All potential stakeholders should consult professional advisors promptly to have their positions evaluated.

Installments 3 through 8 of this series focused on the specific concerns of charities that were victims of Madoff and similar schemes and advocated that every charity should respond pro-actively in the wake of the Madoff scandal and the current adverse economic climate, whether or not it was a Madoff victim itself.

We will now undertake a discussion of the concerns of an Indirect Individual Investor (“III”) who has been embroiled in the Madoff scandal not as a result of a direct investment with him The III may have invested in an entity that was either (i) a fund, investment manager or other vehicle, such as one of the well-publicized hedge funds that were “feeders” for Madoff, or (ii) an investment vehicle, such as a partnership or limited liability company, that was formed for the express purpose of aggregating sufficient funds from multiple investors to meet the minimum investment thresholds established by Madoff from time to time. There can be other permutations or combinations of these types of entities. Each of these types of entities will be defined in this series as a Direct Entity Investor (“DEI”).

This series will not address in detail the potential tax issues facing the III, as there has been extensive discussion in numerous other publications and internet postings on the tax consequences flowing from losses on investments with Madoff.

As is true of the Direct Individual Investor (“DII”) with Madoff who was discussed in early installments of this blog series, the III should be doing or have already done a number of things. However, the effort by the III must be on two levels: his or her investment in the DEI and the DEI’s investment in turn with Madoff

The III should collect every scrap of hard copy, digital or electronic information and communication that can be located relative to the investment in the DEI and the DEI’s investment with Madoff (collectively, “III Investment”), including statements, financial or otherwise, from the DEI or Madoff, tax statements such as Forms 1099 from the DEI, annual reports, press releases or other media statements by the DEI or Madoff as to the nature of the investments and returns, etc. Such information will prove to be valuable in identifying the scope of the loss by the III and the sequence of events that gave rise to the loss.

The III has many more complex issues, however, that the DII, who only has to deal with the records relating to a direct investment with Madoff. The III must seek out all formation documents filed with state agencies relative to the DEI and any agreements, such as partnership agreements and operating agreements, DEI tax returns, brokerage reports, DEI tax returns, copies of checks or other records of all payments respecting the III to and from the DEI, requests for distributions by the III, records of the DEI regarding its investments with Madoff and distributions from Madoff, if any. The DEI partnership, operating or similar agreement with its IIIs as to the provision of information and other rights of the IIIs and their III interests is of paramount importance.

To the extent that the DEI is not fully forthcoming with information requested by III or is unable to locate records regarding the III Investment, the III should contact the managers of the DEI in writing or by other means that will evidence the communication to the DEI and its date. Should the III not receive a meaningful response, he or she should contact an attorney or other competent professional to advise on the matter.

[To be continued in Installment 10]