Madoff investors may face clawbacks

Securities litigation in the wake of the Bernard Madoff scandal could snag a whole host of investors who might have to give up whatever gains they received over the past six years, according to legal experts. “The [civil litigation] will spawn a whole industry for the next decade,” according to Bennett Lasko, partner at the Chicago law firm of Drinker Biddle & Reath LLP. Mr. Lasko joined a panel of legal experts at the Managed Funds Association conference in Key Biscayne, Fla. to offer perspectives on the legal fallout from the ongoing Madoff investigation. The impact of the anticipated “clawback” efforts by bankruptcy court trustees could go far and wide, he said. “As a general rule, if an investor or a fund took out profits from any investments made with Madoff over a two- to six-year period, they will have to give that money back,” Mr. Lasko said. Redemptions of principal investments, however, would likely be viewed as outside the reach of the courts, he said. “This case will test the limits of trustee powers to go after investors,” Mr. Lasko said. “My guess is the trustee will sue everyone in sight and let the funds sort it out with the investors who may have redeemed money.” Then there is the even stickier issue of fees paid by investors to funds or advisers who believed they were investing in a legitimate strategy. While some are starting to argue that those fees should be returned to the investors because they were based on assets that likely were non-existent, Mr. Lasko called it “a tough claim to make, but one that is scary to the fund manager.” “I think the fee issue is going to be one of the big battles,” he added.