No winners from alleged Madoff Ponzi as clawbacks rule the day

In the CEP autosurf Ponzi scheme case, a court-appointed receiver filed dozens of lawsuits against program “winners,” forcing them to return profits on the theory there can be no winners in an illegal enterprise. The receiver, William F. Perkins, placed CEP in bankruptcy and then methodically went about the task of clawing back money for the estate.Perkins, who effectively is running CEP as a debtor-in-possession, has negotiated settlements with a number of winners.Last month he triumphed over CEP’s owners, Clayton Kimbrell and Trevor Reed, in a civil trial for fraud and breach of fidiciary duty.Judge James E. Massey ordered Kimbrell and Reed to return about $1.5 million in fraudulent transfers they made to themselves, family members, employees and other CEP principals.Some of the clawback cases against CEP winners still are being heard, about 17 months after the initial filing. More than 20 trials against individual defendants are scheduled next month in U.S. Bankruptcy Court in Atlanta.

CEP was declared a Ponzi by a federal judge, while Madoff remains an alleged Ponzi operator who told authoritites that the Ponzi could amount to $50 billion in losses. The July 2007 SEC complaint against CEP said about $12 million flowed through the firm in an illegal securities offering.

Perkins maintains a CEP website from which visitors may access all the court documents. It’s well worth a visit.Talk in the Madoff case has turned to what the court-appointed receiver might do to recover cash. Owing to the size of the alleged scheme, things could get downright ugly. In theory, people who made withdrawals could be ordered to return them — and this group includes individual investors, money managers and charities.Lawyers are apt to use terms such as “fictitious profits” and “fraudulent conveyance” to describe redemptions by investors before the Ponzi collapse. The prospects are horrifying because investors didn’t know anything untoward was occurring behind the scenes, and many of them likely have spent all or part of the money.See this Bloomberg News story.

If the case follows the CEP model, Madoff and insiders — if any — could be forced to return illegal transfers. Prior to his arrest, Madoff said he wanted to distribute up to $300 million to employees. If such transfers were made — recently or in years past in the form of bonuses — it’s possible that the money could be ordered returned even if spent.

Ugly doesn’t even begin to describe the battles that could ensue. Charities that relied on Madoff to manage money used for good deeds and took dedemptions could be targeted to pay the money back. There is the potential for pain in many, many places, and it’s possible the clawbacks could go back six years.Blinded to the reality that Ponzi schemes can have devastasting consequences, some autosurf supporters still are arguing that the government has no business sticking its nose in where it doesn’t belong.Incredibly, an autosurf whose launch is set for next year has targeted nonprofits in early promotions. Promoters have suggested it’s a great way to publicize the business and get cash flow.AdSurfDaily, which has ceased to operate in the wake of the government’s August seizure of nearly $100 million, promoted at least one nonprofit, funding it with $100,000 in “ad packs” and asking members to contribute.“ASD President, Andy Bowdoin, has generously donated 100,000 ad packages to this organization,” the ASD Breaking News site said on July 5, about a month prior to the seizure.ASD encouraged members to send donations for the charity to ASD headquarters and even to transfer “donations from your [ASD] Cash Balance.”