Understanding Clawbacks - Uncle Sam's Hot New Tool That Has Some Fraud Victims Crying Foul

Understanding Clawbacks - Uncle Sam's Hot New Tool That Has Some Fraud Victims Crying Foul

Until the Bernie Madoff case, the term "claw back" was virtually unknown in the asset recovery world. Now it has become a powerful tool for court appointed receivers and a nightmare for victims who managed to independently recover some of their investment. The Wikipedia definition is quite vague (forget finding the term in a conventional dictionary): "Any recovery of a performance related payment based on discovery that the performance was not genuine."Until a few years ago, the last victims to invest in a Ponzi or pyramid scheme had little chance of ever seeing any of their money. Those lucky enough to get in on the ground floor of the scheme or who retained counsel early enough were the only ones to see any money.Classic Ponzi or pyramid schemes rely on an ever broadening base of new money coming in to pay old investors. Ultimately the scheme collapses under its own weight. The newest investors always lose. Until now. U.S. courts are becoming increasingly sympathetic to efforts to "claw back" some of the profits of earlier investors in order to pay the newer investors. Unfortunately, the earlier investors have often long ago spent those profits not knowing they could be ordered to give back some of the money at some future date.Thus far, courts have been reluctant to allow clawbacks of anything more than profits. By way of example, a person who invested $100,000 and later cashed out his investment plus $30,000 in interest might have to disgorge the interest. A receiver could seek to have the court "claw back" any monies received beyond the original $100,000 principal.One federal judge in Pennsylvania found no legal prohibition against clawing back any monies recovered. The government, however, has a stated policy of not recovering principal from innocent investors who cashed out early.What does this mean for investors who decide to sue of recover their investment losses? I recommend that any "profits" or interest recovered in excess of the original investment be segregated into a special account until all filing deadlines have passed. Why? To insure that these profits are available if a receiver is later appointed and a court does order that profits be turned over.With courts allowing claw backs, why would anyone want to retain private counsel and recover their losses? Unfortunately, the federal government has very limited resources. Notwithstanding the extensive publicity that often accompanies a new Ponzi scheme or fraud prosecution, most fraudsters are not prosecuted. When the government does step in, receivers must share whatever is collected with all victims. Fraud victims usually can get a much higher recovery by being first to civilly prosecute a fraudster. Collect more than your initial investment, however, and there is a chance that you might have to share your "profits" with other victims.By waiting for the government to step in, there is a higher risk of getting nothing or very little.The case law on claw backs is very recent and in a state of flux. Consult with a competent asset recovery lawyer before spending any of your recovery.

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