Magazine article Newsweek

Made Money with Madoff? Don't Count on Keeping It

Magazine article Newsweek

Made Money with Madoff? Don't Count on Keeping It

Article excerpt

Byline: Mark Hosenball

The lucky folks who cashed in and got out before Bernard Madoff's $50 billion investment empire came crashing down might not be as lucky as they think. Sources close to the Madoff case say that a recent court ruling in a similar collapse--a Ponzi scheme called the Bayou Group--is likely to provide the legal road map for recovering as much money as possible from the Madoff mess. And if so, those who profited stand to lose not only their gains but also, in some cases, the original principal they invested in the scheme.

Madoff's reputation as a financial wizard evaporated following disclosures that his business was a giant Ponzi scheme in which he paid out generous but fake profits to early investors from funds deposited by later ones. The clean-up is likely to fall under the jurisdiction of the federal bankruptcy court in Manhattan, which is already sifting through Bayou wreckage. That case made headlines last summer when Sam Israel, the fraud's mastermind, disappeared shortly before he was due to report to prison; his abandoned SUV was discovered outside New York City with the words SUICIDE IS PAINLESS scrawled on its hood. A few weeks later, Israel turned himself in to authorities.

In October 2008 a judge in the Bayou case, Adlai Hardin Jr., ruled that investors who cashed out their interests within two years of the scheme's exposure had to hand back their principal as well as their profits--even though they were innocent victims of the swindle--if there was evidence that they got out because they suspected, or had been warned, there was something amiss. …

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