What’s ahead for Madoff’s victims?
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What’s ahead for Madoff’s victims?

After master swindler Bernard Madoff pleaded guilty last week to bilking billions of dollars from investors, his victims pondered their options.

Investors who had been told they were receiving dividends from their investments paid income tax on those funds only to learn later they were paying money to the government for nothing. The IRS issued a directive on Tuesday that would help investors in Madoff funds recoup some of those tax dollars, but left investors from so-called feeder funds – which primarily invest in what are called master funds – wondering what to do next.

“We who were in feeder funds did not get very much out of this, from what I understand,” said state Sen. Loretta Weinberg of Teaneck, who lost her life savings through an IRA her financial adviser had invested in Madoff funds.

The IRS announced earlier this week that it would provide relief to some Madoff investors who paid taxes on phantom dividends. During a U.S. Senate hearing on Tuesday IRS Commissioner Doug Shulman set forth guidelines for restitution, available at IRS.gov.

“I’m glad they’re doing it for a very large group of people and I’m glad our federal representatives brought the IRS in and the IRS became a little bit more understanding,” Weinberg said. “But I think they need to go a step further.”

Weinberg “didn’t even have a piece of paper with Bernie Madoff’s name” until his arrest. The golden rule of investing is to diversify, she said, but that does not mean having multiple financial advisers. Weinberg’s adviser had diversified her account but in different Madoff investments.

“From everything I’ve heard from my accountants, they received computerized lists of these investments over the years and it ‘added up,'” she said. “To find out all this paperwork was a sham and he was able to get away with it was mind-boggling.”

While Weinberg is unlikely to recoup anything from her IRA, she is hopeful that something can be salvaged from her other investments, in particular the taxes she paid on her bogus income.

Weinberg is investigating joining a lawsuit with others from her investment group, although the exact nature of such a suit has not yet been determined, she said.

“We need to know how it happened, who were the other responsible parties – because I’ve seen nothing that convinces me he did this all by himself,” she said. “Where was the SEC? Why, after all the red flags that were raised, did they give him a clean bill of health? I want to know who the guilty parties were and where our regulatory agencies were.”

Because of her position Weinberg travels and she hears complaints, she said, from people who were also Madoff’s victims.

“It affects so many people right here in Bergen County as well as in New Jersey that I believe the 4,800 number [of victims] might represent more of these feeder funds, who in turn represented hundreds,” Weinberg said. “I don’t think we know the true number right now.”

Englewood resident Burt Ross, like many others, is waiting to hear from the government about getting a refund of some of the tax dollars he paid out. He reported a loss of $5 million from the Ponzi scheme, and although his dividends were reinvested, he said, in the past three years, he paid roughly $275,000 in federal taxes and $75,000 to the state on income that never existed.

Ross, a former mayor of Fort Lee turned real estate investor, hopes to recover $500,000 from an Federal Deposit Insurance Corporation claim, which would return about 10 cents on the dollar for his losses – better than nothing, he said. Investors have to accept that they will only recoup pennies on the dollar, if anything, when all is said and done, he added.

Recovering the lost tax money is an important step, he said, as the government should not benefit from the victims of Madoff. The government allows a statute of limitations of three years to dispute tax records, which would not allow investors to reclaim most of their money, but at least some of it.

“My feeling is that’s still going to be a fairly small sum, whatever it is it is,” Ross said. “We have to start off with the basic reality that the overwhelming bulk of the money that was stolen will not be retuned. I’m prepared to live with that, because I think that’s the reality.”

Ross praised the Justice Department for its swift arrest and conviction of Madoff.

“In three months they arrested Mr. Big and put him in jail for the rest of his life,” he said on Monday. “For me, there was a sense of relief, a sense of justice – not revenge but justice. The beginning of closure.”

Ross added that he hopes others will learn from the mistakes that put him in this position. First and foremost, he said, he will no longer rely as much on people’s recommendations,

“Even though the people who recommended Madoff are sophisticated, bright people, you want to use your own brain and ask your own questions,” he said.

The incident also reinforced the lesson of “putting too many eggs into one basket.”

Lastly, he said, quoting another adage, if something’s too good to be true, it’s probably not true. Ross said Madoff’s claims of 10 percent to 12 percent of profits each year should have been a tip-off.

“Hindsight is always 20-20,” he said. “We got taken by the greatest con artist in history but I feel if he’s 90 percent responsible, I’m 10 percent. I can’t work on his 90 percent. I can work my 10 percent. It’s a very expensive lesson to learn but maybe if other people can benefit from my mistakes maybe something will come from this,” Ross said.

Recouping losses may be more difficult than just getting back taxes paid on dividends.

Those pursuing legal action are divided among individual investors who directly invested with Madoff and corporate entities that invested with him, said Brian Cousin, a partner in the New York law firm Seyfarth Shaw, who is heading up his firm’s Madoff response team. His firm is working with 10 cases, split between individual investors, nonprofit organizations, and feeder funds. While Ross and Weinberg’s dividends were reinvested into their funds, some investors took at least part of their dividends, which could complicate the process.

“All victims want to try to find all their accounting records and figure out if they’re a net winner or a net loser,” Cousin said. “If you were investing for 20 years and taking money out as you go, it may turn out you redeemed more money at the end.”

Victims may submit claims to the Securities Investor Protection Fund, which has $1.2 billion available to pay out on all claims, but individual claims are capped at a few hundred thousand dollars.

While individuals like Weinberg and Ross are looking to win back some of their tax dollars, that is not an option for nonprofit groups.

“The nonprofits, like Hadassah, are not going to be able to get any tax benefit from the loss,” Cousin said. “An individual who files tax returns should be able to take a deduction for a tax loss. It’s not the same as getting your money back, but you can recognize that in your tax return and get a benefit in terms of the loss.”

In some respects, Cousin said, nonprofit organizations are in a worse position than for-profit businesses or individuals because they cannot claim tax deductions for losses.

“One of the biggest areas of potential recoupment for individual investors is the opportunity to amend tax returns and report losses as an amendment to tax returns,” Cousin said.

If, however, a nonprofit organization received advice from a third party to invest with Madoff, the nonprofit could have a claim against the third party for breach of fiduciary duty, according to Cousin.

“If there was an independent investment adviser that provided advice for the organization, that adviser did not perform due diligence with respect to Madoff,” he added.

For more information on the liquidation of Madoff’s assets, visit www.madofftrustee.com.

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