Looks like Madoff going to the clink is also going to mean the end of a serious money train for a lot of politicians according to this report by Open Secrets.
As recently as September 2008 he wrote a $25,000 check to the Democratic Senatorial Campaign Committee (see here).
Googling around I haven't been able to find any definitive report on whether recipients of his largesse will return the contribution. This story indicates that Congressman Markey will give away the equivalent to charity, but it seems unclear on many of the others.
An interesting legal question is whether even if the recipients, such as the DSCC, want to keep these funds whether they actually can. These contributions all look like classic fraudulent transfers. Under the Uniform Fraudulent Transfer Act section 5 a transfer is fraudulent if "if the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation."
Clearly Madoff was insolvent at the time of these transfers in light of his contingent liabilities. Moreover, I can't see how a political donation could be seen to be anything but a transfer for less than "reasonably equivalent value" as that term traditionally has been defined.
Congress amended the bankruptcy laws a few years ago to protect transfers to charitable organizations but that wouldn't apply to political organizations.
So it seems to me that even if the politicians don't want to return these donations they likely are going to have to anyway, for the benefit of Madoff's creditors.
The statute of limitations for fraudulent transfers varies a lot from state-to-state but may be up to 6 years, in which case creditors (or Madoff's bankruptcy trustee) could reach back pretty far to recapture these donations.
Note also that under the law Markey may still be subject to having to give back the money Madoff contributed, even though he "gave" it away to charity. Although the charity would be protected, as the initial transferee Markey would not be protected.
New York law probably applies here and there may thus be some specific wrinkles that are different from this general discussion. For instance, my research indicates that New York may still be under the Uniform Fraudulent Conveyance Act. It also looks like New York law has a six year statute of limitations. This might change the details but not the general argument here. I would appreciate insights from any readers more familiar with New York fraudulent transfer law than I am.
Bernard L. Madoff Investment Securities LLC was clearly insolvent at the time, but the donations came from Madoff himself, not his company. Does this make a difference? Was Madoff personally insolvent at the time?
I’m willing to accept – unless someone shows evidence to the contrary – that the politicians who accepted contributions from Madoff did so in good faith and had no knowledge of the fraud he was running. That being said, if it wrong to keep them, then it’s because the funds were essentially stolen from Madoff’s victims. In which case the right thing to do would be to try to return the money to people who were swindled by Madoff and not to give it some other party even if that other party is a charity.
Good point. Let me think. My guess is the way this would work would be that the transfers from Madoff Investments to Madoff were actually fraudulent transfer to insiders and the transfers from Madoff to the politicians were constructively fraudulent, and the politicians were good-faith transferees. As I read the UFTA, I don't see a defense that would help the politicians in this case. It also seems odd that one could wash a fraudulent transfer by first engaging in an actually fraudulent transfer to an insider and then gifting it to an outsider. And I don't see anything in the UFTA that protects that third party.
Madoff himself was also insolvent, as his liabilities for fraud, if nothing else, exceeded his assets.
The transfers of funds are fraudulent against creditors only to the extent the value transferred exceeds the value received. I don't know any case law on political contributions, but the analogous area of charitable contributions, as Todd noted, required Congress to intervene to prevent fraudulent transfer law from applying.
Finally, it's too bad he gave to the DNC instead of the RNC. Since the RNC is a charity case, the gift might have been more likely to stick
I suspect that the recipients can make a pretty good argument that the value received exceeds the value transferred.
I do agree that the contributions should be given back to those from whom it was wrongly taken, but the point made earlier, that the contributions were from Madoff personally, not the company, makes it quite possible that they were not in fact fraudulent transfers (unless the argument Zywicki makes were to succeed).
Suppose, for example, your friend stole my car and then gave it to you. The fact you were unaware of the theft of my car when you accepted it as a gift from your friend would NOT prevent me from repossessing the car.
Clearly Madoff was insolvent at the time of these transfers in light of his contingent liabilities. Moreover, I can't see how a political donation could be seen to be anything but a transfer for less than "reasonably equivalent value" as that term traditionally has been defined.
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I should think that if any of the parties were to argue that it was a transfer for "reasonably equivalent value", then it would be admitting to making or receiving a bribe.
While the politicians can in all likelihood prove they had no actual knowledge of Madoff's fraudulent scheme, the fair consideration aspect will doom them. The money were gifts (unless there was some quid-pro-quo going on that opens up another bag of worms), and that essentially nixes the ability for the politicians to protect themselves
If the political contributions from Madoff should be returned to the victims, why not the "profits" of anyone who cashed out with Madoff before this all broke? A lot of people made a lot of money off this Ponzi scheme for a lot of years.
The only players who lose it all are those still in the game for whom there are no chairs left when the music stops. Everyone else made out like bandits, including probably a lot of people close to Madoff who knew approximately when the music was about to stop playing.
Are all those earlier players in a Ponzi scheme considered to be legally home free, or will some of them have to give back some of their gains as well? Does not knowing you profitted from a fraud entitle you to keep your gains?
On the other hand, suppose you were going to declare bankruptcy on Friday and you sold me your car on Thursday, the amount recoverable would depend on whether the price we agreed on was commensurate to the value of the car.
My Prof did like 10 mins on how to pronounce "Bonafide" so you sound like a Real Lawyer.]
I believe the trustee is going after at least some of those who received payments. Unless a recipient knew it was a fraud or was an insider, the preference period under the Bankruptcy Code is 90 days.
Oren--I'm not sure that the "no title from a thief" principle applies to cash. Is there authority for this? Any other way of getting recipients to cough something up?
Regardless of legal niceties, pols should give the money to the Trustee in this and similar cases. The charitable contribution is nice, but the real "charity" is to those who were swindled.
This is a deep rabbit hole, but one that I'm happy to explore. Merrill Lynch, Bear Stearns, Stanford (why has he not been arrested yet?), Lehman Brothers, et al. Let the clawbacks begin!
Good question. David Drake is correct that to the extent innocent investors actually gave value to Madoff they are protected from attack for a fraudulent transfer. So the trustee would have to pursue them for a preference in bankruptcy.
But what about to the extent that they received dividends over what they invested? That should be a fraudulent transfer, I think, because it exceeds reasonably equivalent value.
There is one catch--to the extent that this was an actual Ponzi scheme, if Madoff was using the investments of later investors to fund earlier investors, then the latecomers could potentially try to impress certain funds with a constructive trust. I'm not sure though that this was an actual Ponzi scheme as a fraud of some sort. My understanding is that mainly what he was doing was essentially just taking people's money and then paying it back to them over time. Is that right? Do we know for sure how he was running this scheme?
I think that's right. This was an argument I made back in the fall about bailouts for the banks. To the extent that the government was giving bailouts rather than making these guys file bankruptcy, it was totally appropriate to permit clawbacks for excessive bonuses and compensation that would potentially be recoverable in bankruptcy.
How can one perform "Chief Compliance Officer", "complaince attorney" and/or "work in the trading section" duties when there was no compliance or trading activities going on, according to Madoff's guilty plea? Aren't those family members liable and vulnerable?
I suspect the answer is "Yes we can!" All it needs is a friendly judge and a complicit press.
By the way, is a ponzi scheme by definition insolvent, or does it only become insolvent on the day the scheme can't bring in enough money to cover?
Madoff admitted yesterday, formally, in his plea allocution that this was a Ponzi scheme. The receiver said that no legitimate trading had occurred at Madoff's investment advisory firm in at least the last 13 years. Madoff was taking in more money the week before he was arrested and the assets on hand --$300 million or so--vastly, vastly exceeded the liabilities (which were at least $18 billion and likely much higher). How can this not have been a Ponzi? In other words, when he paid out hundreds of millions to investors over the years, he had to have been using some or all of the "new" money to do so.
I am not sure I agree that NY law applies, isn't Markey in Mass.? It may depend on where the transfer/donation took place. Also, I am not sure how you measure "reasonable equivalent value" in the context of campaign donations. Clearly, the donor to a politician often thinks and is motivated by getting something in return for his or her donation, such as access to a busy politician, which I imagine some economist could quantify. I don't Markey will make that argument, though.
We've heard about all those Madoff investors who, over the years, innnocently received what they believed to be unearned income, i.e., dividends or interest from Madoff's investment vehicles. Presuming that these investors dutifully paid federal, state and possibly local taxes on same, if they are required to disgorge these amounts and do so, will they be entitled to file amended tax returns to request a refund of those taxes paid? Are they limited to the past 3 years?
Madoff's firm had legitimate accounts and executed a large number of legitimate transactions. In part, it was the volume of legitimate business that allowed him to hide the fraud from the SEC and other regulators for so long. He was able to give the auditors mountains of paper that they could trace to valid transactions. Kind of like (in the movies) it's possible for a ca$ino to hide a lot of drug and prostitution activity.
Having said that, I find it hard to believe that Madoff could have pulled this off by himself. Well, that's not accurate. I find it impossible to believe he did it by himself.
A related question is what is the character of that loss and when is it deductible. The IRS may argue the loss is deductible as a casualty loss under IRC Sec. 165. Casulty losses are only deductible to the extent they exceed 10% of AGI. Many tax professionals believe that the loss is deductible under a different part of Sec. 165 as a loss in connection with an activity entered into for profit. This would produce an ordinary loss, the amount of the loss would NOT be reduced by 10% of AGI, and the loss could generate an NOL if it were large enough.
As for the timing of the deduction, that depends on when it's clear there is no reasonable prospect for recovery from Madoff, insurance, or some other source. The IRS may take the position that it's unclear how much investors will ultimately receive from Madoff's bankruptcy estate and other sources, so any losses cannot be deducted until 2009 or later. Many tax professionals believe it was clear by the end of 2008 that, on a percentage basis, most investors would recover very little from any identifiable source and that taxpayers can deduct on their 2008 returns their estimated net loss (basis in the investment less a reasonable estimate of any recovery).
To make matters more complex, the proper tax treatment may depend on whether the taxpayer made the investment directly with Madoff or through a partnership that invested (directly or indirectly) with Madoff. The tax treatment may change depending on whether the investor is an individual, a trust, or another entity.
Fun stuff!
Since this was an ongoing, concealed fraud don't the statutes of limitation start running from the time of discovery?
What about other sources besides fraud? What if a sex slavery ring was giving money to politicians, governments, charities, etc.?
Can charities lose their accreditations, business licenses (to operate as a charity), tax-exempt status, etc. for receiving stolen property and the like?
Oh - I guess that excludes them all...
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