Forfeiture of Madoff's Assets: Challenges for Victims
By: Richard A. Kirby, Rebecca L. Kline Dubill, Scott P. Lindsay
On March 12, 2009, Bernard Madoff pleaded guilty to 11 counts of a criminal information filed by the U.S. Attorney’s Office for the Southern District of New York (“S.D.N.Y.”). The information seeks forfeiture of all proceeds traceable to the commission of Madoff’s fraud in an amount “exceeding” $170 billion. Assuming that the government can recover any additional assets through the exercise of its criminal or civil forfeiture powers, questions remain as to whether and how those assets will be distributed to Madoff’s victims. Two recent large-scale securities fraud cases, Adelphia Communications Corp. and the Bayou Group, illustrate how protracted this process can be for victims.
Criminal forfeiture is a powerful tool that permits the government to seize a defendant’s assets that were used in, or were the fruits of, criminal activity. The government also has civil forfeiture powers and can seize property related to criminal activity even if it does not belong to a convicted defendant. Although as a separate matter the trustee appointed by the Securities Investor Protection Corp. (“SIPC”) in the Bernard L. Madoff Investment Securities, LLC (“BMIS”) liquidation proceeding is also seeking to recover BMIS assets, the full range of the government’s forfeiture powers are broader than those of the SIPC trustee and may result in additional assets being recovered.
Typically, forfeited assets are distributed to crime victims in one of two ways: (1) the petition for remission process, in which victims apply for remission from a victims’ fund administered by the U.S. Department of Justice (“DOJ”); or (2) restitution, in which the U.S. Attorney General “restores” the forfeited assets to the court overseeing the criminal cases, and the court distributes funds to victims through an order of restitution.
In the Adelphia case, John and Timothy Rigas were convicted in 2004 on various counts relating to their looting of Adelphia’s corporate assets and forced to forfeit significant personal assets, including their Adelphia stock. In 2005, pursuant to a non-prosecution agreement, the company that the Rigas’ had controlled, Adelphia, agreed to repurchase this forfeited stock for $715 million, which was paid into a victims’ compensation fund. This victims’ fund is administered by DOJ under the petition for remission process and has faced substantial litigation over its protocols. As a result, nearly nine years after the fraud was revealed, no distributions from the fund have yet been made to Adelphia’s creditors or shareholders.
Bayou involved a $400 million Ponzi scheme. In their plea allocutions, the Bayou principals agreed to forfeit both personal and corporate assets, including $100 million in Bayou funds, as well as several dozen Bayou investment assets. The S.D.N.Y. U.S. Attorney’s Office appointed a receiver to collect and liquidate the assets so that they could be restored to the court overseeing the criminal proceedings for distribution to victims through an order of restitution. Although the U.S. Attorney’s Office obtained possession of the $100 million in cash and other investments as a part of the preliminary forfeiture orders, it took almost three years to distribute the forfeited assets to victims. The restitution process was further complicated and delayed due to litigation initiated by former investors, who had been sued in the Bayou bankruptcy on a clawback theory for return of fictitious profits and principal. These former investors succeeded in establishing themselves as contingent victims for purposes of the restitution fund.
If Adelphia and Bayou serve as a guide, it likely could be years before Madoff’s victims receive any distribution of property seized by the government through the exercise of its forfeiture powers. This may provide an opportunity — given the massive scale of the fraud and the quasi-governmental nature of SIPC — for the government to chart a different course and use the established SIPC liquidation proceeding to distribute any assets it seizes to victims of Madoff’s scheme through a transfer of forfeited assets to the SIPC trustee. Such a transfer could expedite the ultimate distribution of funds to Madoff’s victims and create certain efficiencies in the processing of claims and the handling of objections. While it remains to be seen whether the government will be successful in identifying and seizing assets not already under the control of the SIPC trustee, it is not too soon to consider an alternative paradigm to the government’s traditional and slow-working forfeiture distribution mechanisms.
