Clawback adds to Madoff clients' pain

  • Article by: ERIC WIEFFERING , Star Tribune
  • Updated: January 12, 2011 - 8:58 PM

Minnesotans who lost millions when Bernie Madoff's Ponzi scheme came to light two years ago now face an even grimmer prospect: Having to return millions more they withdrew from their accounts in the six years before the fraud was exposed.

Victims of the fraud, in other words, now stand accused of being its beneficiaries.

That's the language used by Irving Picard, the trustee handling the liquidation of Madoff's firm. Picard has filed hundreds of lawsuits seeking to "claw back" fictitious investment profits paid to those who had entrusted their money to Madoff.

While the exact number of clawback cases involving Minnesotans is unknown, a random sampling suggests Picard is seeking the return of well over $100 million from a variety of individuals, investment partnerships and charitable foundations with direct or indirect ties to the state.

The principle behind these clawback demands is simple, but merciless: If withdrawals from your Madoff account exceeded deposits, you were paid with other people's money. So, give it back.

Example: You deposit $10 million with Madoff. Over the years, that account "grows" to $30 million. At least that's what Madoff tells you. So, you make $20 million in withdrawals.

Since the profits were illusory, in the eyes of the receiver you've spent your original $10 million plus $10 million worth of other people's money. And he wants that second $10 million back.

Didn't know about the fraud? Lost your entire investment with Madoff? Doesn't matter.

The lawsuits, some of which were first reported in December by the American Jewish World, strike deep into the heart of the wealthy Jewish community in the Twin Cities.

"In some ways, the Twin Cities was a geographic center for the Madoff scandal," said Mordecai Specktor, the paper's editor and publisher.

An early analysis of ZIP codes from Madoff's client list showed Minnesota as the third- or fourth-largest source of clients, after New York/New Jersey, Florida and Denver. Initial reports suggested the losses in the Twin Cities could total as much as $300 million.

But one thing we know now that we didn't two years ago is that Madoff's clients were a lot less wealthy than they imagined. Madoff bought no securities during the last 13 years of his firm's existence. The monthly statements depicting metronomic to spectacular investment gains were solely the product of a febrile imagination, not an investment strategy.

One of Madoff's earliest Minnesota clients/victims/beneficiaries was Miles Q. Fiterman, a Thief River Falls native who made a fortune in the homebuilding industry after World War II. By the time of his death in 2004, Fiterman was an acclaimed philanthropist. His surviving wife, children and other descendants were Madoff clients right up until the end.

According to Picard's lawsuit, the Fiterman family trusts collected "more than $126 million in fictitious profits over the life of Madoff's Ponzi scheme," and he wants $87.7 million back. He also wants $716,294 from a Fiterman foundation that helps fund research on digestive diseases and $15.7 million from two investment funds controlled by Steven Fiterman and his wife, Susan. Steven Fiterman is the son of Miles.

A spokesman for a management company named in some of the filings said Steven Fiterman was traveling and unavailable to comment.

Picard also filed clawback claims against David Miller, the CEO of Minnetonka Moccasin, and his father, Marshall Miller.

Court documents show that, between 1993 and 2008, the Millers deposited almost $379 million in an investment account managed by Madoff, but withdrew almost $409 million. Picard wants them to repay $30.2 million, in addition to another $4.4 million in withdrawals made from a corporate profit-sharing account.

David Miller did not respond to a request for an interview.

Picard also has filed clawback claims against dozens of individuals for withdrawals made from individual retirement accounts that Madoff managed on their behalf. The amounts typically range from $1 million to $2 million.

Charitable groups hit, too

Charitable family foundations that had accounts with Madoff have also been asked to return money to the trustee. The Werner Foundation, which has a Minnetonka address, has been hit with a claim seeking the return of more than $1.3 million.

Picard's clawback cases could drag on for years, but they've already driven a wedge between Madoff's victims. Cheering him on are those whose withdrawals from Madoff were less than what they'd originally invested. For them, the more Picard collects, the more they stand to recover of their original principal.

"We're very happy about the clawback actions," said one of Madoff's former clients in the Twin Cities, who spoke only on condition that her name not be published. "Everyone would hate me if you used my name."

ericw@startribune.com • 612-673-1736

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