There was an unmistakable air of wealth in the room at last Wednesday's town hall for Bernie Madoff's victims, hosted by accounting firm Holtz, Rubinstein, Reminick in New York. Part of it was the setting, the luxurious Jumeirah Essex House hotel, part of it was the well-groomed hair, the elegant clothes, and the easily spotted facelifts among the mostly elderly crowd. But mostly it was that familiar sense of entitlement that came through in everything from the attendees' dignified rage to the substance of their questions, many of which were variations on "Who can we blame for this?" Which, of course, really meant "Who can we sue?"
As horrifying as the idea might sound, nonprofits and elderly victims are as likely to be compelled to return Madoff funds as anyone else, according to experts.
There were the exceptions. The poor middle-aged man at the meeting on behalf of his wife, for example, whose employer had somehow been among the few unlucky companies whose 401(k) plans were handled with Madoff. Because they had a pooled fund instead of individual accounts, the employees there feared that the Securities Investor Protection Corporation—which doles out payments of up to $500,000 to victims of fraud—would only give them one payout instead of the 100 needed to cover all the affected staff. The answer from the panel's legal expert, Professor Ronald Colombo of Hofstra University, was not entirely encouraging.
"SIPC has generally been very tight with their money," Colombo said, adding that it might be a "tough call" whether the organization decided in his wife's favor.
SIPC is one avenue for retrieving funds lost to Madoff, but with a maximum of $500,000 available per investor, many victims are looking toward lawsuits, where higher payouts might be possible. Attendees were disappointed to hear the experts shoot down nearly all of their suggestions for potential legal action at the town hall—ideas like suing the SEC for negligence, suing J.P. Morgan on money-laundering charges, or even suing the IRS for failing to investigate their own now-inaccurate tax returns.
"We're trying every avenue we can, you know?" one questioner said, throwing his arms up in exasperation after being told that a potential suit against banks who handled Madoff's money was unlikely to succeed. "It's frustrating as hell."
One might expect that such a gathering would be all pathos and solidarity, with victims affected by the fraud seeking comfort in their common experience. There were moments where one felt—well, not quite empathy, but at least the room's unified rage. For example, attendees shouted approval at questioners who bashed the SEC for bungling their investigation. But overall, this meeting was strictly business, not therapy. Few, if any, questioners expressed sympathy for the others' stories, with most keeping a laser-like focus on their own personal emergencies as they tried to figure out how to report their losses in their tax filings, whether they should sue their financial adviser, and if they have any hope of receiving money if a political solution is reached in Washington regarding the Madoff case.
Part of this individualist attitude stems from the cold reality of the recovery process: Every victim is now as much each other's enemy as they are their counterpart. Madoff's fully liquidated assets are believed to total less than $1 billion, a small fraction of his firm's losses. The real money is almost entirely in the hands of the victims themselves, making for a Lord of the Flies of the wealthy and well-connected, one that was on full display at Essex House on Wednesday.
The word on everyone's mind at the town hall was "clawback," a phrase that sounds like a mythical demon and is about as feared. Clawback is a procedure used by trustees appointed to fraud cases, in this case Irving Picard, in which investors are forced to return funds they withdrew earlier from the phony operation in order to distribute it evenly among those affected. Unlike in, say, a stock crash, clawbacks mean that there is no such thing as "getting out at the right time." This is why victims are eyeing each other with suspicion. One woman angrily called out those goody-goody nonprofits who lost money with Madoff, saying she was worried that they would be exempted from clawback actions and leave private investors like herself to foot the bill.
"I would think in bankruptcy that everyone shares the burden," she said.
As horrifying as the idea might sound, nonprofits and elderly victims are as likely to be compelled to return funds as anyone else, experts say.
"It seems very heartless, but sometimes we have to do what we have to do for the benefit of the victims," Robb Evans, whose firm Robb Evans & Associates LLC has been appointed receiver in some of the biggest cons in recent memory, said over the phone. "If that means suing people and putting them in desperate straits, then that's what has to happen."
Many of the questioners at the event asked whether they should file a claim with SIPC over their stolen funds, with some noting that their lawyers were specifically advising against such a move. Members of the panel said repeatedly that there was no reason not to try their luck with SIPC as the worst-case scenario would be that the corporation denied their claim. But as Professor Colombo noted afterward, that advice was based on a perhaps naïve premise—that those who cashed out of Madoff early wouldn't violate the law.
"The disconnect here is I'm assuming people won't lie," Colombo said after the event. There could be no other interpretation of one attendee's comment that she feared her SIPC filing would provide a "road map" to her assets. Other questioners asked about rumors that Madoff's records were in total disarray, raising the possibility that the trustee might not be able to trace their funds if they keep their heads down.
"If you file a claim for a million, then yes, when the clawback letter comes for a million, you can't lie," Colombo said. However, "if they're asked and they lie, they can now go to prison versus giving up [their initial investment]...this goes on all the time. Clawbacks and bankruptcy happen a lot."
Ethically, there's no question that giving the stolen funds back is the right thing to do regardless of whether the money was earned as part of a deliberate scam, but the decision becomes that much harder for cashed-out investors when the money is sitting in their bank accounts already. They know that they'll likely receive pennies back for every dollar they turn in as part of a process that could take years. Meanwhile, if Madoff's records are truly indecipherable, unscrupulous investors may walk away with millions in stolen cash while they're left subsidizing victims who lost everything. Those who try to evade the trustee run enormous risks and could end up in jail themselves, potentially adding a second layer of tragedy to the Madoff case. Now that would be a neat trick: the alleged Ponzi artist bringing his victims down to his own level.
Benjamin Sarlin is a reporter for The Daily Beast. He previously covered New York City politics for The New York Sun and has worked for talkingpointsmemo.com.