Can the Madoff Trustee Recover Fictitious Investment Gains Distributed to Investors Prior to Inception of the SIPA Proceeding?

Possession, they say, is nine-tenths of the law.  But sections of the Bankruptcy Code (incorporated, in pertinent part, by reference into the Securities Investor Protection Act of 1970 (SIPA)) providing for avoidance of preferential transfers and fraudulent conveyances demonstrate that possession is not invariably determinative of ownership.  This point has renewed relevance in light of the alleged $50 billion Ponzi scheme orchestrated by Bernard Madoff.  The question for many investors who thought they got out unscathed is now: will the SIPA trustee be able to require them to return money already paid out?  Investors who lost all or substantially all of their investments with Madoff are asking the same question, since it looks increasingly likely that any recovery for Madoff investors will come from claw back of formerly distributed amounts as opposed to discovery of hidden cash.  We explore these questions in detail, outlining the statutory bases of recovery actions, defenses to such actions, relevant precedents, statute of limitations concerns and hedge fund marketing issues.

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