Thursday, January 01, 2009

And The Largest Fraudulent Conveyance Recipient Is...

Today, there are far more experts on the subject of Fraudulent Conveyance than there were several weeks ago. And rightfully so, since it is a fascinating concept - particularly in the $50bn case of He Who I've Promised Not To Discuss as one of my year's resolutions, and one that in days of old might have merited a lively discussion in the The Talmud. Roger Ehrenberg at Information Arbitrage discussed the perils in this case. It generated many passionate comments, yet, missed one of the most fascinating and salient aspects of the case which was kindly highlighted by reader "Shairon The Parliamentarian" (profile sadly unavailable):
Perhaps the singularly largest beneficiary as a recipient of fraudulently conveyed funds was the United States Government since many of the redeemers will have paid capital gains taxes upon the BLM redemptions with fraudulently conveyed funds. As a result, it will be incumbent upon them to disgorge said tax receipts back to the administrator for ultimate redistribution. Given the length of time many investors were "in", the capital gains, and thus the taxes thereupon would, one might assume, be very large.

Nothing like kicking someone when they are down! And it gets worse for Uncle Sam since (as has been widely pointed-out) the investment losses will offset investment gains for many taxpayers (only of course if ever again investment gains outside the US Govt Bond market resurface again within the statute of limitations for their carry-forward) for years to come.

14 comments:

Woland said...

I am wondering, in the spirit of the Wells Fargo ruling
by treasury re Wachovia losses, whether a marriage to
a B.M. victim would allow the marrior to offset his/her
capital gains against the losses of the marryee. Not that there's anything WRONG with that.

Ritholtz said...

Its easy enough to amend past tax returns.

In cases of fraud such as this, there may be a proactive approach taken by the IRS in terms of issuing guidelines . . .

212213 said...

C,

Not sure investors need to worry about carrying forward losses. Arguably, the losses are due to "theft", and "theft" losses can potentially offset ordinary income. If an investor owns a substantial business through an entity that is transparent for tax purposes, or an investor rotates most of their portfolio into debt producing interest income, they may well be able to soak up "theft" losses. This might even be an opportunity to invest in something ordinarily toxic, like zero coupon bonds.

212213 said...

C,

One other point, assuming investors can rapidly utilize "theft" losses to Madoff by deducting them against ordinary income, the tax receipts to the US fisc are merely an interest free loan to the government. Not a permanent gift to Uncle Sam.

Manc Trader said...

Happy New year Cassandra. This is my favourite must read blog.
For some reason couldn't post a comment for the last week or so of 2008.

SBG said...

Whether those who get out early in a Ponzi scheme are obligated to cough up their money is an interesting and still unresolved legal question. In principle it seems to me that the "winners" and losers should be made as whole as possible. It would be outrageous
if the Feds made off with taxes paid on gains by the "winners". See the attached link re fraudulent conveyance liability of "winners" in Ponzi schemes.

http://www.dechert.com/library/White%20Collar_03-07.pdf

212213 said...

"Whether those who get out early in a Ponzi scheme are obligated to cough up their money is an interesting and still unresolved legal question."

Given the various badges of fraud, and popular press skeptical of Madoff like the 2001 article on madoff, why wouldn't the statute of limitations kill claims against investors who pulled money more than 4 years ago (or after whatever number of years the statute period is)?

SBG said...

Re statute of limitations, the clock usually doesn't begin ticking until the potential plaintiff knows (or should have known) he has a claim. As a practical matter, if the Madoff scheme has been slowly building over 15 years, clearly it is going to be nearly impossible to unscramble the whole thing now.

212213 said...

"Re statute of limitations, the clock usually doesn't begin ticking until the potential plaintiff knows (or should have known) he has a claim."

Like I said before, after the 2001 Barrons article criticizing Madoff, why wouldn't a reasonable person have been put on notice that Madoff was likely making money by fraud, either fraud against his investors or fraud against his brokerage clients? And if so, why wouldn't that have started the statute of limitations?

But hey, maybe you can find some hungry plaintiff attorney willing to take the case on contingency... That's the american way.

SBG said...

If it was so obvious how come smart (or at least rich) people continued to put lots of real money at risk with Madoff until the very end?

212213 said...

"If it was so obvious how come smart (or at least rich) people continued to put lots of real money at risk with Madoff until the very end?"

The question is not whether it was obvious to a random man on the street whether Madoff was defrauding investors or brokerage clients. Or whether a lazy investor who performs zero diligence -- other than confirming Madoff had an open face and nice manners -- should have known. The question is whether an investor would have been put on notice after the 2001 Barrons article if they acted as a woman of prudence, discretion and intelligence does in managing her own investments. And after the Barrons article and other questions raised publicly, she likely would have thought Madoff was shady 'sumbitch.

But hey, there are probably hungry plaintiff lawyers who'd love a shot to prove she wouldn't have suspected any fraud. Go talk to them; that's the american way.

Anonymous said...

http://nakedshorts.typepad.com/files/madoff.pdf

Anonymous said...

"If it was so obvious how come smart (or at least rich) people continued to put lots of real money at risk with Madoff until the very end?"

Have any of you ever followed the OTC or Pinks? They are still governed by SEC law, but I can name 10 OBVIOUS, BLATANT scams operating right now. Dozens of SEC complaints filed by hundreds of people EVERY DAY for 2 years that I've been following, yet nothing is ever done. In the rare case an action is brought, it's on charges dating back 5 years - after the damage has been done.

I know the OTC/pinks are caveat emptor, etc, but they are still covered under securities law.

Anonymous said...

W.T.F.? Why are you silly folks worried about this esoteric, tax, fiscal issue. The Gov't will just appeal to a higher power [ed] entity .... and get a bailout. Moral Hazard be DAMNED. Sorry, could not resist ... especially after reading Cheney and Lehrer ... and asking over and over ... "our" leadership here in America boils down to ......