Ponzi schemes: the implications for defrauded investors.

• Author: Odom, Dianne

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Do YOU HAVE A CLIENT THAT LOST MONEY in the Bernard Madoff Ponzi scheme? A Ponzi scheme is defined as "an investment swindle in which some early investors are paid off with money put up by later ones to encourage more and bigger risks" ( Merriam-Webster's Collegiate Dictionary 964 (Merriam-Webster 2003)). Madoff is alleged to have done just that until, in 2008, an increase in requests for redemptions from his investors caused his $50 billion pyramid to collapse.

If a client has lost money in the Madoff Ponzi scheme or another pyramid scheme, what are the client's options? The Securities and Exchange Commission (SEC) has frozen all the assets of Madoff's company as well as his personal assets. Although the Securities Investor Protection Corporation (SIPC) is handling investor claims and the investments of Bernard L. Madoff Investment Securities LLC in a liquidation of the company, usually a judge assigns a receivership to handle all the company's affairs.

The receiver is an officer of the court, not an SEC employee, and ultimately has to answer to the judge that appoints him or her. The receiver is compensated from the assets collected. Along with aggregating the assets for liquidation, the receiver is also in charge of determining who is entitled to the money collected.

Typically investors are required to submit claim forms that the receiver (or in this case the SIPC) reviews for accuracy. Investors will have to document the amount they are claiming as owed to them. That amount will be the initial amount invested plus additional investments, less any interest, dividends, or proceeds from the sale of any of the securities (redemptions).

For example, if an investor placed $10,000 with Madoff and received 8% a year from 1999 until December 2008, the investor will have a claim of $2,000 [$10,000 investment--(8% interest x 10 years)]. If the same investor invested the $10,000 but did not actually receive any return, the claim would be the original $10,000 investment.

Caution: One issue in this situation will be whether the taxpayer actually reported the 8% annual earnings on his or her tax returns.

On the SIPC website (www.sipc.org), item number three under the seven most frequently asked questions is, "How long before I get my investment back?" The answer:

Most customers can expect to receive their property in one to three months. When the records of the brokerage firm are accurate, deliveries of some securities and cash...