Madoff Liquidator May ‘Claw Back’ Charities’ Profits

Date: Wednesday, September 2, 2009
Author: Erik Larson and Linda Sandler, Bloomberg.com

Irving Picard, the liquidator for Bernard Madoff’s investment business, said he might sue charities that took out more money than they invested with the imprisoned con man to force them to return the difference.

The law requires him to file so-called clawback suits against investors that profited from the fraud at Bernard L. Madoff Investment Securities LLC, even if they weren’t aware of his $65 billion Ponzi scheme, Picard said yesterday. Charities aren’t exempt from such “avoidance actions,” he said.

“Picard has an obligation to the bankruptcy estate to collect all the assets he can find and in theory he has to treat everyone the same way,” said William Josephson of Fried Frank Harris Shriver & Jacobson LLP, who previously helped to run the New York State Law Department’s Charities Bureau. “The bankruptcy code doesn’t differentiate” between charities and other institutions, he said.

Picard until now hasn’t spelled out his policy for dealing with charities that unknowingly profited from the fraud by investing with Madoff or his so-called feeder funds.

“He has been cagey,” Josephson said.

Picard, a lawyer with Baker & Hostetler LLP, declined to discuss specific nonprofit institutions. “We will look at charities on a case-by-case basis before determining what action may be appropriate,” he said.

Picard so far has pursued only charities that he claims should have known about the fraud. He sued longtime Madoff investor Jeffry Picower, a philanthropist and lawyer, and his charity in May for allegedly taking fake profit of $6.7 billion for himself and his affiliates over a 20-year period. His charity is now closed.

Charity Sued

Philanthropist Stanley Chais, another longtime investor, was sued by Picard for about $1 billion in damages. He told a judge that Madoff almost wiped him out and that he can’t afford to defend against Picard’s claims. His charity also is closed.

Picard told reporters in May he would pursue investors who took more money out of Madoff funds than they put in. They got “more than their fair share,” he said. New York State law enables him to claw back sums removed in the six years before Madoff’s arrest.

Jewish charity Hadassah, which builds hospitals in Israel, invested $40 million with Madoff and took out $130 million in profits, a person familiar with the matter said. Hadassah’s ex- chief financial officer, Sheryl Weinstein, who resigned in 1997, claimed in a book published last month that she was once Madoff’s lover.

$90 Million

Under Picard’s formula, $90 million of Hadassah’s fake profit may now technically be a clawback target. The charity’s spokesman, Steve Rabinowitz, said he couldn’t comment on how much was withdrawn during the past six years.

A total of about $12 billion was withdrawn by clients from Madoff’s firm in 2008, including about $6 billion in the 90 days before the Madoff bankruptcy, David Sheehan, a lawyer representing Picard, said in May. That money is a potential source for Madoff victims to recover some of their investments.

Lawyer Helen Chaitman, a Madoff victim, said clawbacks in her view were inconsistent with the U.S. Securities Investor Protection Act that spells out how investment-fraud cases are handled. Picard is “working against the national policy of restoring investor confidence,” she said in an e-mail today.

“I am adamantly opposed to clawbacks,” she said.

Madoff, 71, pleaded guilty in March and was sentenced on June 29 to 150 years in prison for using money from new clients to pay earlier investors. Picard is suing Madoff’s biggest investors and beneficiaries, including offshore hedge funds and the con man’s wife, Ruth.

The case is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC, 08-01789, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

To contact the reporters on this story: Erik Larson in New York at elarson4@bloomberg.net; Linda Sandler in New York at lsandler@bloomberg.net.