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Imagine you invest in a hedge fund, and get some amount of returns back. But then, years later, a lawyer comes and tells you to give him the profits because the

Imagine you invest in a hedge fund, and get some amount of returns back. But then, years later, a lawyer comes and tells you to give him the profits because the fund was illegitimate (without you knowing this) and therefore they don't belong to you. This is exactly what is happening to all these people. Doesn't this feel unfair to anyone else?

gdfasfklshg4 8y ago
Deeply unfair. The lawyers don't seem to have had to prove that the investors knew that the fund was illegitimate at. My understanding is that the fund was regulated so the assumption should have been that it was legitimate. I would not be surprised if results in people losing their retirement funds.
- ubernostrum 8y ago
  The analogy to stolen goods is useful. Generally, if you receive stolen goods, there are two possibilities: you knew they were stolen (read: a prosecutor can convince a jury you knew), in which case you lose the goods and get prosecuted. Or you didn't know they were stolen (read: prosecutors can't convince a jury you knew), in which case you merely lose the goods. This may seem unfair from the perspective of the unknowing recipient of stolen goods, but letting them keep the goods is equally unfair from the perspective of the original victim, and would feel like the law giving its blessing to the theft (it would also encourage schemes to knowingly but with plausible deniability receive stolen goods). So there's no solution that is guaranteed to appear fair from all perspectives. But the law generally sides with returning the goods to the original owner, effectively undoing the original theft. In this case, the "investors" who are being targeted by the suits are also getting to keep their own original capital; they're just being required to hand back the ill-gotten gains. So the remedy is effectively undoing the Ponzi scheme.
  - gdfasfklshg4 8y ago
    If you buy the stolen goods from a big box retailer that is routinely regulated then this analogy might be useful. As it is it does not apply very well to this situation.
    - Retric 8y ago
      Considering the amount of counterfeit goods sold on Amazon I suspect at least some of it was simply stolen. In such a case I would expect the items to be clawed back if possible. Though with the possibility of Amazon making the buyer whole. That also seems like the correct approach here where anyone running a feeder fund should be on the hook.
      - gdfasfklshg4 8y ago
        I don't think of a third party selling on Amazon as a big box retailer.
        Retric 8y ago
        I consider Amazon as a big box retailer, and commingling means buying from Amazon was identical to buying third party. Though, I guess that changed over time and I now consider Amazon more a shady market stall.
- sseveran 8y ago
  Hedge funds are not regulated the way you think. Mostly the SEC requires the generation of a lot of paperwork and various filings. The SEC does conduct inspections of funds but mostly this is not that big a deal. Remarkably the SEC did inspect Madoff Investments and did not conclude it was a fraud even though it obviously was. I will leave the reader to judge the competence of the SEC but if you are thinking that this was hard to see I would recommend Harry Markopolos's book 'No One Would Listen'. Ultimately as a potential investor this would have been easy to spot as at least suspect. The first couple of due diligence questions to ask are about custody arrangements and their auditor. Understanding that if you are not an accredited investor you are not allowed to invest in hedge funds also makes it obvious that a fund willing to take your money may be acting fraudulently. Finally it did result in people losing their retirement funds, for some people absolutely everything.
  - gdfasfklshg4 8y ago
    > Remarkably the SEC did inspect Madoff Investments and did not conclude it was a fraud even though it obviously was. > Ultimately as a potential investor this would have been easy to spot as at least suspect. You think that even after the SEC failed to spot the fraud investors with far less power should be able to? I don't quite follow your argument here. A little more clarification would be nice. > Finally it did result in people losing their retirement funds, for some people absolutely everything. Taking money that people have received 20 years ago off people will also result in some people losing everything. (I know that they say that the people they are extracting the money from are keeping the original investments but what if some of the money has been spent?)
    - sseveran 8y ago
      Sure. So simply asking who their auditor is and what the custody arrangements are will tell you a lot. Hedge Funds and other asset managers use a relatively small number of accountants to do their auditing. Madoff used a small family accountancy. https://en.wikipedia.org/wiki/David_G._Friehling https://en.wikipedia.org/wiki/David_G._Friehling This is not to excuse the SEC or let them off the hook. The SEC proved to be ultimately grossly incompetent at best, if not negligent or actually complicit. Investors should no more rely on the SEC to protect them than the hens should rely on the fox to protect the henhouse. This has been demonstrated repeatedly. https://www.barrons.com/articles/when-chinese-stock-fraud-was-rampant-1521659454 https://www.barrons.com/articles/when-chinese-stock-fraud-wa... https://www.wsj.com/articles/SB123577641445497313 https://www.wsj.com/articles/SB123577641445497313 Finally there is a statute of limitations when clawing back money that people received. I believe in Madoff's case it was two years. Additionally there were a number of lawsuits against a subset of investors that allegedly new about the scheme and profited from it. https://www.reuters.com/article/us-madoff-trustee-opinion/judge-trims-madoff-trustees-profit-clawback-suits-idUSBRE8401JF20120501 https://www.reuters.com/article/us-madoff-trustee-opinion/ju...
Cthulhu_ 8y ago
If the investors couldn't have known it was a scummy practice, then no; if it was approved by the SEC, then the SEC should be responsible for this money because they signed off on it. If the SEC or a similar organization wasn't involved however, then it was the investors' own risk and IMO law enforcement can seize the investments.
- lifeisstillgood 8y ago
  Good point I guess - was Madoff regulated by any obvious regulator? SEC?
- michaelmrose 8y ago
  I cannot imagine how its possible for a regulatory body to be financially liable in place of the actual players for wrongdoing. The economics are wacky. The SEC doesn't get a portion of the profits how is it supposed to secure investors against malfeasance by the actual players? You are basically asking for the government to insure that nothing bad ever happens and accept unlimited liability if it ever does.
projectramo 8y ago
Well, it is also unfair to invest in a fund and have your money go out as phantom profits to other investors to boost the very fund. (disclosure: I haven't been in either situation, to my knowledge). So lets say it is unfair on both sides, but we want to come up with a policy that will optimize behavior in the future. What is the effect of this policy?
pjc50 8y ago
It does feel somewhat unfair, but it's long-settled law on stolen goods: if you buy a car and it turns out to be stolen, or a house with an improper title, you don't get to keep it. In both cases the buyer is supposed to check and beware of "too good to be true" offers. Note that they get to keep the principal, so they're not even out the money they might be if they bought a stolen car.
- hx2a 8y ago
  I agree. This also sets an important precedent that future investors in different funds must consider. If something seems too good to be true, there might be consequences for them. They are disincentivized to look the other way.
  - skummetmaelk 8y ago
    Not really since they still get to keep all the profit they made off the stolen goods.
    - tlrobinson 8y ago
      That's exactly what's not happening in this case.
      - chuckkir 8y ago
        Actually, I think it is. It sounds like they're clawing back the investment profit, but it is likely those profits were invested in something else which also earned a profit. That additional profit is yours to keep as far as I can tell.
        russh 8y ago
        So they get to keep the profit they made off the profit but but not the profit itself?
        adambyrtek 8y ago
detaro 8y ago
"I didn't know I was benefiting from a crime, so I should be able to keep the profits I made instead of them being used to repay people that actually lost money" doesn't feel fair either. I think a somewhat useful comparison is trade in stolen goods: even if you didn't know that something you bought was stolen, you still can be forced to return it to the actual owner. This situation is actually better than with physical goods, since they're only going after profits (which arguably were stolen from others), whereas in the case of stolen goods the buyer can be left hanging trying to recover the money they paid.
shaki-dora 8y ago
As per the article, the mechanism here is clawing back "profits" from people who withdrew money from Madoff's fund over the years. It's literally reversing the basic mechanism of this Ponzi scheme. I think your objection would be valid if, for example, they sued contractors that were paid to renovate Madoff's office (and being paid with customers' money). But as it is, I think the veil of ignorance might serve as a guide. Consider: You are informed that, before his untimely death in a completely unnecessary re-enactment of Wilhelm Tell's apple-related stunts (only this time with LSD), your great-granduncle invested $10,000,000 of the profits made from his seminal literary addition to the comin-of-age canon into Madoff's funds. You do not know if he ever found the clarity of mind to withdraw any funds. Would you choose the $10 million, or prefer a 50% chance at $20 million? (the diminishing marginal value of money also comes into play here).
- SonicSoul 8y ago
  veil of ignorance No. I don’t know if any of the 10 investments i made in 2018 are Ponzi schemes. I have to rely on regulations and hope companies like Lending Club are legit, I don’t pour over their paper work or hiring private investigators to figure out how they do their business. It would be silly to confiscate my profits because Lending Club turned out to be shady. Me hiring a fund to produce returns on investment is no different than hiring a painter to paint a room. update all good points in replies. i stand corrected on my understanding of this issue :)
  - mikeash 8y ago
    There’s a major difference in that it’s not possible to unpaint a room, but it’s trivial to undo a money transfer. A painter can’t be returned to his previous state, but an investor can.
    - kbutler 8y ago
      Some Madoff-touched money is going to be invested at a profit, some at a loss, some spent, some beneficiaries will be dead with assets left to heirs, etc. Unwinding /anything/ from a decade ago is non-trivial. It's even possible (likely?) that some direct Madoff investors were also customers of the funds that have money being clawed back.
BonesJustice 8y ago
Or course it’s unfair. There is no ‘fair’ outcome to something like this. Everybody got scammed. The entire ordeal is reprehensible, but what are you going to do?
Nursie 8y ago
Not really. The 'profits' were illusory, and effectively the proceeds of crime. What seems fairest here is to try to unwind the entire thing, and return as high a percentage of everyone's money paid-in as possible over the life of the scheme. Unfortunately it's never going to work out well for everyone - it was a massive fraud.
mikeash 8y ago
It’s even more unfair to invest in a fund and get wonderful returns and then years later you’re told that the fund was illegitimate and all of your money is gone. A crime was committed with numerous victims. It’s not possible to achieve a completely fair outcome for all involved.
deleted 8y ago
[deleted]
scandox 8y ago
Every investment comes with responsibilities that are also part of the risk profile of the investment.
mirimir 8y ago
It's hard to say, from just TFA. As I read it, their goal is for everyone to at least get back their principal. But the only way to manage that is to claw back withdrawals. Put another way, they've constructed a but-for world where everyone just invested, but took no returns. Then they distribute everything that's available in proportion to those investments. So as a result, everyone simply lost the same percentage of their investment. Isn't that fair? What's confusing, I think, is the idea that they're somehow punishing people who withdrew profits. Because maybe they should have known that they were too good to be true. But I don't think that's relevant. They're just unwinding the thing.
- sokoloff 8y ago
  I don't think that is fair exactly as described. Someone who invested $1MM in 1988 should get back more than someone who invested $1MM in 1999, IMO, because their alternative investment would have grown substantially in the interim. IOW, on a then-present-value basis, the 1988 investor invested more.
  - mirimir 8y ago
    If there were actual earnings to distribute, adjustments such as you describe would certainly be appropriate. However, it seems likely that, in the aggregate, all investors (as a group) lost. So maybe getting back X% of principal is the only workable approach. And I don't know specifics. Perhaps they're taking stuff like that into account.
  - URSpider94 8y ago
    It doesn’t work like that. If their alternate investment had gone bankrupt, they would have lost everything instead. Nobody has a right to a risk-free rate of return, if they are chasing higher-risk return rates. Giving everyone back their capital is about as even-handed as you’re going to get.
    - sokoloff 8y ago
      If I invested $100 in 1700 and you invested $100 5 minutes ago, my investment was a greater sum in today's money, IMO. Doesn't matter if we both invested in T-bills (or war bonds), corporate bonds, or equities.
TheCondor 8y ago
In light of how regulated hedge funds are, it doesn’t seem so bad. I think that if you’re ever insentivized to be ignorant, then that suggests some ethical shenanigans. If someone like Madoff can live the charmed life he had and pay the price while other investors that profit from it can just keep the profits, it creates some very perverse incentives in the market.
markbnj 8y ago
It may seem unfair on the surface, but it's a lot less unfair than losing your principle to the same scam that paid out the stolen money as fake returns.
paulpauper 8y ago
it does seem unfair, and I think this is why crpyto currencies may see more adoption, because they are immune to claw-backs. Instead of keeping $100k in a bank, where creditors can take it, put in a crypto, although there is much more volatility.
- ganzuul 8y ago
  ...A version of this is probably already happening in the criminal underground.
- short_sells_poo 8y ago
  How exactly do you envision this to work? The government won't care where the client ferreted away the proceeds, they'll just want them back. Unless the entire funding structure including the currency and all parties in the transaction are completely anonymous and it is impossible to trace the funds to any one person, but then this raises further problems.
dangerboysteve 8y ago
Maybe some of these investors used the proceeds to invest in other legitimate funds, made a profit and benifited from an "interest free loan".
- agotterer 8y ago
  Or maybe some of those investors used the money to send their kids to college and now they have to re-mortgage their house to cover the clawbacks.
  - peteretep 8y ago
    Sure, that sucks. This is why Madoff is in prison. There's no particular reason you shouldn't get just as fucked as everyone else who was invested, just because you took profits at a certain time though.
    - Dylan16807 8y ago
      Not no reason. You invested in a solvent fund. They invested in an insolvent fund. You could have a similar thing happen without a scam. Trying to get everyone back to their original investment is probably the best method overall, but it's a tradeoff.
ganzuul 8y ago
People have bought stock in companies which violently subvert democracy and do irreparable damage to nature, with no consequence. It is good that accountability in finance at least comes this far.
downandout 8y ago
It is unfair, and may be financially devastating to some people. I would imagine that at least some of these people took their profits, invested them in other things that didn’t pan out, and now are faced with being sued by the trustee for money they no longer have, many years later, through no fault of their own. There should be legal limits on clawbacks in those cases where the target was unaware of the fraud and paying it back will cause them financial ruin.
Animats 8y ago
Most of the claw-backs involve investors who were heavily involved with marketing the fund and got extra-high returns from it. Stanley Chais, Madoff's front man in Beverly Hills, Jeffery Picower, Madoff's front man in Palm Beach, and J. Ezra Merkin, Madoff's front man in New York's Fifth Avenue Synagogue were the three main individuals. They were not innocent victims.
ABCLAW 8y ago
Doesn't feel unfair to me. This is a fairly straightforward application of the principles behind the law of restitution and unjust enrichment. Here, an early Ponzi scheme participant was enriched at the expense of a later Ponzi scheme participant. The remedy is to disgorge the profits of the first so as to make the second whole again. Here we're upset because we don't believe that the act of investing was 'unjust', but functionally being 'unjust' in this area doesn't necessarily mean 'wrong'. It can mean unjustified, or lacking a proper basis. Viewed in this way, one's timing within the ambit of a Ponzi scheme would need to be the justification to entitle early participants to outsized profit. Should our legal system lend force to this type of arrangement, or unwind them as best it can?

gdfasfklshg4 8y ago

Deeply unfair. The lawyers don't seem to have had to prove that the investors knew that the fund was illegitimate at. My understanding is that the fund was regulated so the assumption should have been that it was legitimate. I would not be surprised if results in people losing their retirement funds.

ubernostrum 8y ago
The analogy to stolen goods is useful. Generally, if you receive stolen goods, there are two possibilities: you knew they were stolen (read: a prosecutor can convince a jury you knew), in which case you lose the goods and get prosecuted. Or you didn't know they were stolen (read: prosecutors can't convince a jury you knew), in which case you merely lose the goods. This may seem unfair from the perspective of the unknowing recipient of stolen goods, but letting them keep the goods is equally unfair from the perspective of the original victim, and would feel like the law giving its blessing to the theft (it would also encourage schemes to knowingly but with plausible deniability receive stolen goods). So there's no solution that is guaranteed to appear fair from all perspectives. But the law generally sides with returning the goods to the original owner, effectively undoing the original theft. In this case, the "investors" who are being targeted by the suits are also getting to keep their own original capital; they're just being required to hand back the ill-gotten gains. So the remedy is effectively undoing the Ponzi scheme.
- gdfasfklshg4 8y ago
  If you buy the stolen goods from a big box retailer that is routinely regulated then this analogy might be useful. As it is it does not apply very well to this situation.
  - Retric 8y ago
    Considering the amount of counterfeit goods sold on Amazon I suspect at least some of it was simply stolen. In such a case I would expect the items to be clawed back if possible. Though with the possibility of Amazon making the buyer whole. That also seems like the correct approach here where anyone running a feeder fund should be on the hook.
    - gdfasfklshg4 8y ago
      I don't think of a third party selling on Amazon as a big box retailer.
      - Retric 8y ago
        I consider Amazon as a big box retailer, and commingling means buying from Amazon was identical to buying third party. Though, I guess that changed over time and I now consider Amazon more a shady market stall.
sseveran 8y ago
Hedge funds are not regulated the way you think. Mostly the SEC requires the generation of a lot of paperwork and various filings. The SEC does conduct inspections of funds but mostly this is not that big a deal. Remarkably the SEC did inspect Madoff Investments and did not conclude it was a fraud even though it obviously was. I will leave the reader to judge the competence of the SEC but if you are thinking that this was hard to see I would recommend Harry Markopolos's book 'No One Would Listen'. Ultimately as a potential investor this would have been easy to spot as at least suspect. The first couple of due diligence questions to ask are about custody arrangements and their auditor. Understanding that if you are not an accredited investor you are not allowed to invest in hedge funds also makes it obvious that a fund willing to take your money may be acting fraudulently. Finally it did result in people losing their retirement funds, for some people absolutely everything.
- gdfasfklshg4 8y ago
  > Remarkably the SEC did inspect Madoff Investments and did not conclude it was a fraud even though it obviously was. > Ultimately as a potential investor this would have been easy to spot as at least suspect. You think that even after the SEC failed to spot the fraud investors with far less power should be able to? I don't quite follow your argument here. A little more clarification would be nice. > Finally it did result in people losing their retirement funds, for some people absolutely everything. Taking money that people have received 20 years ago off people will also result in some people losing everything. (I know that they say that the people they are extracting the money from are keeping the original investments but what if some of the money has been spent?)
  - sseveran 8y ago
    Sure. So simply asking who their auditor is and what the custody arrangements are will tell you a lot. Hedge Funds and other asset managers use a relatively small number of accountants to do their auditing. Madoff used a small family accountancy. https://en.wikipedia.org/wiki/David_G._Friehling https://en.wikipedia.org/wiki/David_G._Friehling This is not to excuse the SEC or let them off the hook. The SEC proved to be ultimately grossly incompetent at best, if not negligent or actually complicit. Investors should no more rely on the SEC to protect them than the hens should rely on the fox to protect the henhouse. This has been demonstrated repeatedly. https://www.barrons.com/articles/when-chinese-stock-fraud-was-rampant-1521659454 https://www.barrons.com/articles/when-chinese-stock-fraud-wa... https://www.wsj.com/articles/SB123577641445497313 https://www.wsj.com/articles/SB123577641445497313 Finally there is a statute of limitations when clawing back money that people received. I believe in Madoff's case it was two years. Additionally there were a number of lawsuits against a subset of investors that allegedly new about the scheme and profited from it. https://www.reuters.com/article/us-madoff-trustee-opinion/judge-trims-madoff-trustees-profit-clawback-suits-idUSBRE8401JF20120501 https://www.reuters.com/article/us-madoff-trustee-opinion/ju...

Cthulhu_ 8y ago

If the investors couldn't have known it was a scummy practice, then no; if it was approved by the SEC, then the SEC should be responsible for this money because they signed off on it. If the SEC or a similar organization wasn't involved however, then it was the investors' own risk and IMO law enforcement can seize the investments.

lifeisstillgood 8y ago
Good point I guess - was Madoff regulated by any obvious regulator? SEC?
michaelmrose 8y ago
I cannot imagine how its possible for a regulatory body to be financially liable in place of the actual players for wrongdoing. The economics are wacky. The SEC doesn't get a portion of the profits how is it supposed to secure investors against malfeasance by the actual players? You are basically asking for the government to insure that nothing bad ever happens and accept unlimited liability if it ever does.

projectramo 8y ago

Well, it is also unfair to invest in a fund and have your money go out as phantom profits to other investors to boost the very fund. (disclosure: I haven't been in either situation, to my knowledge). So lets say it is unfair on both sides, but we want to come up with a policy that will optimize behavior in the future. What is the effect of this policy?

pjc50 8y ago

It does feel somewhat unfair, but it's long-settled law on stolen goods: if you buy a car and it turns out to be stolen, or a house with an improper title, you don't get to keep it. In both cases the buyer is supposed to check and beware of "too good to be true" offers. Note that they get to keep the principal, so they're not even out the money they might be if they bought a stolen car.

hx2a 8y ago
I agree. This also sets an important precedent that future investors in different funds must consider. If something seems too good to be true, there might be consequences for them. They are disincentivized to look the other way.
- skummetmaelk 8y ago
  Not really since they still get to keep all the profit they made off the stolen goods.
  - tlrobinson 8y ago
    That's exactly what's not happening in this case.
    - chuckkir 8y ago
      Actually, I think it is. It sounds like they're clawing back the investment profit, but it is likely those profits were invested in something else which also earned a profit. That additional profit is yours to keep as far as I can tell.
      - russh 8y ago
        So they get to keep the profit they made off the profit but but not the profit itself?
      - adambyrtek 8y ago

detaro 8y ago

"I didn't know I was benefiting from a crime, so I should be able to keep the profits I made instead of them being used to repay people that actually lost money" doesn't feel fair either. I think a somewhat useful comparison is trade in stolen goods: even if you didn't know that something you bought was stolen, you still can be forced to return it to the actual owner. This situation is actually better than with physical goods, since they're only going after profits (which arguably were stolen from others), whereas in the case of stolen goods the buyer can be left hanging trying to recover the money they paid.

shaki-dora 8y ago

As per the article, the mechanism here is clawing back "profits" from people who withdrew money from Madoff's fund over the years. It's literally reversing the basic mechanism of this Ponzi scheme. I think your objection would be valid if, for example, they sued contractors that were paid to renovate Madoff's office (and being paid with customers' money). But as it is, I think the veil of ignorance might serve as a guide. Consider: You are informed that, before his untimely death in a completely unnecessary re-enactment of Wilhelm Tell's apple-related stunts (only this time with LSD), your great-granduncle invested $10,000,000 of the profits made from his seminal literary addition to the comin-of-age canon into Madoff's funds. You do not know if he ever found the clarity of mind to withdraw any funds. Would you choose the $10 million, or prefer a 50% chance at $20 million? (the diminishing marginal value of money also comes into play here).

SonicSoul 8y ago
veil of ignorance No. I don’t know if any of the 10 investments i made in 2018 are Ponzi schemes. I have to rely on regulations and hope companies like Lending Club are legit, I don’t pour over their paper work or hiring private investigators to figure out how they do their business. It would be silly to confiscate my profits because Lending Club turned out to be shady. Me hiring a fund to produce returns on investment is no different than hiring a painter to paint a room. update all good points in replies. i stand corrected on my understanding of this issue :)
- mikeash 8y ago
  There’s a major difference in that it’s not possible to unpaint a room, but it’s trivial to undo a money transfer. A painter can’t be returned to his previous state, but an investor can.
  - kbutler 8y ago
    Some Madoff-touched money is going to be invested at a profit, some at a loss, some spent, some beneficiaries will be dead with assets left to heirs, etc. Unwinding /anything/ from a decade ago is non-trivial. It's even possible (likely?) that some direct Madoff investors were also customers of the funds that have money being clawed back.

BonesJustice 8y ago

Or course it’s unfair. There is no ‘fair’ outcome to something like this. Everybody got scammed. The entire ordeal is reprehensible, but what are you going to do?

Nursie 8y ago

Not really. The 'profits' were illusory, and effectively the proceeds of crime. What seems fairest here is to try to unwind the entire thing, and return as high a percentage of everyone's money paid-in as possible over the life of the scheme. Unfortunately it's never going to work out well for everyone - it was a massive fraud.

mikeash 8y ago

It’s even more unfair to invest in a fund and get wonderful returns and then years later you’re told that the fund was illegitimate and all of your money is gone. A crime was committed with numerous victims. It’s not possible to achieve a completely fair outcome for all involved.

deleted 8y ago

[deleted]

scandox 8y ago

Every investment comes with responsibilities that are also part of the risk profile of the investment.

mirimir 8y ago

It's hard to say, from just TFA. As I read it, their goal is for everyone to at least get back their principal. But the only way to manage that is to claw back withdrawals. Put another way, they've constructed a but-for world where everyone just invested, but took no returns. Then they distribute everything that's available in proportion to those investments. So as a result, everyone simply lost the same percentage of their investment. Isn't that fair? What's confusing, I think, is the idea that they're somehow punishing people who withdrew profits. Because maybe they should have known that they were too good to be true. But I don't think that's relevant. They're just unwinding the thing.

sokoloff 8y ago
I don't think that is fair exactly as described. Someone who invested $1MM in 1988 should get back more than someone who invested $1MM in 1999, IMO, because their alternative investment would have grown substantially in the interim. IOW, on a then-present-value basis, the 1988 investor invested more.
- mirimir 8y ago
  If there were actual earnings to distribute, adjustments such as you describe would certainly be appropriate. However, it seems likely that, in the aggregate, all investors (as a group) lost. So maybe getting back X% of principal is the only workable approach. And I don't know specifics. Perhaps they're taking stuff like that into account.
- URSpider94 8y ago
  It doesn’t work like that. If their alternate investment had gone bankrupt, they would have lost everything instead. Nobody has a right to a risk-free rate of return, if they are chasing higher-risk return rates. Giving everyone back their capital is about as even-handed as you’re going to get.
  - sokoloff 8y ago
    If I invested $100 in 1700 and you invested $100 5 minutes ago, my investment was a greater sum in today's money, IMO. Doesn't matter if we both invested in T-bills (or war bonds), corporate bonds, or equities.

TheCondor 8y ago

In light of how regulated hedge funds are, it doesn’t seem so bad. I think that if you’re ever insentivized to be ignorant, then that suggests some ethical shenanigans. If someone like Madoff can live the charmed life he had and pay the price while other investors that profit from it can just keep the profits, it creates some very perverse incentives in the market.

markbnj 8y ago

It may seem unfair on the surface, but it's a lot less unfair than losing your principle to the same scam that paid out the stolen money as fake returns.

paulpauper 8y ago

it does seem unfair, and I think this is why crpyto currencies may see more adoption, because they are immune to claw-backs. Instead of keeping $100k in a bank, where creditors can take it, put in a crypto, although there is much more volatility.

ganzuul 8y ago
...A version of this is probably already happening in the criminal underground.
short_sells_poo 8y ago
How exactly do you envision this to work? The government won't care where the client ferreted away the proceeds, they'll just want them back. Unless the entire funding structure including the currency and all parties in the transaction are completely anonymous and it is impossible to trace the funds to any one person, but then this raises further problems.

dangerboysteve 8y ago

Maybe some of these investors used the proceeds to invest in other legitimate funds, made a profit and benifited from an "interest free loan".

agotterer 8y ago
Or maybe some of those investors used the money to send their kids to college and now they have to re-mortgage their house to cover the clawbacks.
- peteretep 8y ago
  Sure, that sucks. This is why Madoff is in prison. There's no particular reason you shouldn't get just as fucked as everyone else who was invested, just because you took profits at a certain time though.
  - Dylan16807 8y ago
    Not no reason. You invested in a solvent fund. They invested in an insolvent fund. You could have a similar thing happen without a scam. Trying to get everyone back to their original investment is probably the best method overall, but it's a tradeoff.

ganzuul 8y ago

People have bought stock in companies which violently subvert democracy and do irreparable damage to nature, with no consequence. It is good that accountability in finance at least comes this far.

downandout 8y ago

It is unfair, and may be financially devastating to some people. I would imagine that at least some of these people took their profits, invested them in other things that didn’t pan out, and now are faced with being sued by the trustee for money they no longer have, many years later, through no fault of their own. There should be legal limits on clawbacks in those cases where the target was unaware of the fraud and paying it back will cause them financial ruin.

Animats 8y ago

Most of the claw-backs involve investors who were heavily involved with marketing the fund and got extra-high returns from it. Stanley Chais, Madoff's front man in Beverly Hills, Jeffery Picower, Madoff's front man in Palm Beach, and J. Ezra Merkin, Madoff's front man in New York's Fifth Avenue Synagogue were the three main individuals. They were not innocent victims.

ABCLAW 8y ago

Doesn't feel unfair to me. This is a fairly straightforward application of the principles behind the law of restitution and unjust enrichment. Here, an early Ponzi scheme participant was enriched at the expense of a later Ponzi scheme participant. The remedy is to disgorge the profits of the first so as to make the second whole again. Here we're upset because we don't believe that the act of investing was 'unjust', but functionally being 'unjust' in this area doesn't necessarily mean 'wrong'. It can mean unjustified, or lacking a proper basis. Viewed in this way, one's timing within the ambit of a Ponzi scheme would need to be the justification to entitle early participants to outsized profit. Should our legal system lend force to this type of arrangement, or unwind them as best it can?