Stakeholders in the Madoff Scandal and Their Need to Act Promptly and Proactively – Installment 1

January 12, 2009Articles White Collar Compliance & Defense Blog

The Madoff investment scandal was allegedly the longest, most widespread and financially devastating Ponzi scheme on record. On almost a daily basis since the arrest of Bernard L. Madoff on December 11, 2008, there are new disclosures of victims and classes of victims. Over the next few days this blog will discuss some of the threshold issues that face the manifold stakeholders who have been materially affected by the Madoff scandal. In many cases there may be limited time for victims to act to protect themselves to the maximum. Some of the potential self-protective actions will be identified during the course of identifying the stakeholders. All potential stakeholders should consult professional advisors promptly to have their positions evaluated.

Direct Individual Investors (“DII”)

This class of victim may be the largest in numbers, although not necessarily in potential dollar losses. A DII should collect every scrap of hard copy, digital or electronic information and communication that can be located relative to an investment in Madoff (a “Madoff Investment”), including statements, financial or otherwise, from Madoff, tax statements such as Forms 1099, annual reports, statements by Madoff as to the nature of the investments and returns, etc. Such information may prove to be valuable in isolating the scope of the loss and the factual basis that gave rise to the loss. The factual basis may determine whether or not the DII is a potential class plaintiff should any classes be certified in actions against Madoff and/or his controlled business entities.

Other immediate concerns for DII include the mailing on January 2, 2009, by the Securities Investor Protection Corporation (“SIPC”) of formal claims packages to potential claimants of Bernard L. Madoff Investment Securities LLC, a licensed broker-dealer affiliate of Madoff. The liquidation case is set in the Southern District of New York. Claims by customers must be filed with the trustee in the liquidation case, not SIPC, by March 4, 2008. The notice from SIPC relates to claims of customers of the broker-dealer who may have lost money or securities registered in “street name” or in the process of being registered. It does not relate to investors who may have lost money in the alleged Ponzi scheme that was extraneous to the broker-dealer.

Another immediate consideration for DII are potential claims for refunds that may be filed with federal and state taxing authorities. Generally the statute of limitations for the filing of refunds is a three-year period from the filing date of the original income tax return. For example, in the case of a taxpayer who filed his or her federal and state returns on April 15, 2006 for a 2005 calendar year, no claims for refund can be made after April 15, 2009. Since the income reflected on Forms 1099 that were supplied to DII cannot be correct to the extent there was negligible real income earned from the investment with Madoff, taxes paid based on the Forms 1099 were excessive and can be available for refunds.

[To be continued in Installment 2]