Madoff Clawbacks Point to a Recipe for Fairness
It may seem harsh to take back profits from investors who were unaware of the scam. But the alternative is worse.
Scam artist.
Photographer: Mario Tama/Getty Images
No one wins when money managers set out to defraud their investors, as Bernie Madoff infamously and spectacularly did for decades until his Ponzi scheme came to light in late 2008. But once the scheme is uncovered and the hard work of righting wrongs begins, regulators and courts need the tools to craft the fairest result possible. In the context of Ponzi schemes, that means giving hoodwinked investors an equal opportunity to recover the value of their investments.
Last week, the U.S. Court of Appeals for the Second Circuit got most of the way there in the years-long Madoff saga, but it required some legal gymnastics. It ruled that investors who profited from Madoff’s scheme must return their ill-gotten gains so that less fortunate investors can recover more of their losses. Of course, the three-judge panel ground its ruling in law rather than considerations of fairness — in legal jargon, it found that the Securities Investment Protection Act, which aims to return money to swindled investors, trumps a more general provision in the bankruptcy code that might otherwise prevent the clawback. But in this case, the legal outcome is also the equitable one.