Unweaving the tangled web of Ponzi scheme scams. Picture: 123RF/LIMBI 007
Last week, the US court of appeals for the second circuit got most of the way there in the years-long Madoff saga, but it required some legal gymnastics. It ruled that investors who profited from Madoff’s scheme must return their ill-gotten gains so that less fortunate investors can recover more of their losses.
“The court rightly recognised that a dollar of profit paid to any one investor is a loss to another, no matter the label put on that dollar,” Seanna Brown of BakerHostetler, an attorney for Irving Picard, the trustee in the Madoff bankruptcy, said in an e-mail. With one small but important allowance: investors should be able to recover the real, or inflation-adjusted, value of their investments. For investors caught in a Ponzi scheme, the extent of the injury depends not only on the amount invested but also the duration.
Giving the force of law to such a framework would have several advantages. It would give defrauded investors more confidence that everyone has an equal shot at recovering their money. It would allow regulators and courts to consistently apply the same playbook in resolving these cases. And because the outcome is known in advance, it should expedite the time it takes to sort out the numerous and often competing claims.