Clawback Lawsuits: Hope for Ponzi Scheme Investors
“Clawback” lawsuits are designed to help fleeced investors recover their money from illegal financial dealings, like Ponzi schemes and embezzlement frauds. The SEC’s new proposed clawback rules focus on recouping investors’ money from executive salaries, although clawback lawsuits have also gone after investors who did not suffer financial hardships in the wake of a Ponzi scheme. The success of clawback suits should give investors who lost money through gross misconduct some hope — even investors who lost money with Bernie Madoff have recovered a substantial portion of their lost funds.
It’s hard to imagine the devastation felt by investors who lost their entire nest egg to Madoff’s Ponzi scheme. Following his arrest in 2008, advocates have worked hard to recoup those losses, with significant success. In fact, according to CNBC, 76% of the $17.5 billion stolen via the Ponzi scheme has been returned to defrauded investors. That’s more than regulators originally expected to recover — in many Ponzi scheme cases, trustees have only been able to recover 5% to 10% of the original investment.
The Madoff clawback stands out because investors didn’t simply recover their money from Madoff’s estate. The clawback suit also went after funds from investors who didn’t lose money in the Ponzi scheme because they withdrew funds before the scheme started to collapse. Billionaire Jeff Picard was one of the biggest “winners” in the Ponzi scheme, and his estate made up a huge chunk of the clawback repayments to Madoff’s victims.
Today, many of the payments come from fellow Ponzi scheme investors who are also reasonably defined as Madoff’s victims. The court reasons that this money doesn’t belong to these investors because it was never a return on an investment, but stolen money used to make Ponzi scheme payments. An attorney for Irving Piccard, one of the trustees in the Madoff bankruptcy, told Bloomberg: “The court rightly recognized that a dollar of profit paid to anyone investor is a loss to another, no matter the label put on that dollar.”
New clawback rules proposed by the SEC would focus more tightly on recovering investors' losses from executive staff. When Goldman Sachs recently had to pay $3 billion in fines for their role in a Malaysian government bond scandal, investors clawed back much of the payment from top executives. The scandal began when Goldman Sachs underwrote a Malaysian bond that raised $6.5 billion. Later, members of the executive staff did nothing to intervene as top government officials embezzled the funds. Experts believe clawback lawsuits that focus on executives will provide a stronger deterrent against future mismanagement, which may be why executive compensation clawback policies have grown in popularity in recent years.
The History of Clawback Rules
Clawback lawsuits first became a part of public policy in 2002, when Congress passed the Sarbanes-Oxley Act in an effort to improve investor confidence after the Enron accounting scandal robbed many investors of their retirement funds. The Sarbanes-Oxley Act was designed specifically to dissuade companies from defrauding their shareholders by maintaining an effective financial reporting system, one that auditors could assess.
In 2015, the SEC proposed more clawback rules under the Dodd-Frank Act. Like the Sarbanes-Oxley Act, the Dodd-Frank Act was legislation that came following a wave of economic disaster. This time, the legislation was designed to correct issues that led to the financial crisis of 2007. These new rules would allow investors to recover losses from the CEO’s incentive-based executive compensation, even if it the correction was made after that CEO’s tenure with the company has ended, within three fiscal years.
These rules would come into effect whenever there was an “account restatement,” which means a revision based on a material correction to financial statements. Under the new rule, it wouldn’t matter if the CEO was not directly at fault. Upper-level management has a responsibility to know whether financial reports are accurate, and these new rules would create a financial incentive to take that responsibility seriously.
The Future of the Clawback
If these new rules came into effect, every listed company would be required to have a clawback policy. In anticipation of the adoption of these rules, many companies have already taken steps to make sure they have clawback policies in place. While it’s impossible to known if and when the SEC will finalize these rules, having clawback provisions in place may boost a company’s Institutional Shareholder Services Equity Plan scorecard, which provides shareholders with a valuable assessment of a company’s compensation plan.
How Do Investors Get Money from Clawback Lawsuits?
The Securities Investor Protection Corp (SIPC) provides funds to pay lawyers to recover lost funds. The SIPC is a non-profit insurer created by Congress that has protected investors for the past 50 years, since the recession in the early 1970s. The SEC is also sometimes involved in recouping investor losses.
For most people, the first step toward a clawback settlement begins with contacting a securities attorney. If you believe you were defrauded by a financial services institution and want to know if you can recover your money through a clawback suit, contact one of the securities attorneys at Fitapelli Kurta for a free consultation. Call (877) 238–4175 or email info@fkesq.com.
