This is exactly what is happening to all these people.
Doesn't this feel unfair to anyone else?
Note that they get to keep the principal, so they're not even out the money they might be if they bought a stolen car.
Also there is a special rule for cash. Stolen cash is not treated this way, so if a bank is robbed and has all the serial numbers, they can't take the money from you if you happen to get one of the bills in a transaction.
...or is BTC treated as cash?
[0] https://www.mtgoxlegal.com/2017/10/27/press-release/
[1] https://www.mtgoxlegal.com/2017/11/29/the-legal-advice-civil-rehabilitation/I agree with your first line, but wanted to nitpick the legal statement.
That's not the law on passage of title. Things are a whole lot more complicated than that.
The rules are jurisdiction specific and civilian and common law systems deal with this issue differently. Historical common law treats property as a series of tiered claims, not as a singular entitlement.
Sometimes there are brightline rules regarding registration requirements. Sometimes there are multiple sale good faith caveats. Sometimes there are confounding evidence requirements. etc.
Generally speaking, you never get to keep the item if you knew or ought to have known it was fishy. Beyond that, things vary.
I think a somewhat useful comparison is trade in stolen goods: even if you didn't know that something you bought was stolen, you still can be forced to return it to the actual owner. This situation is actually better than with physical goods, since they're only going after profits (which arguably were stolen from others), whereas in the case of stolen goods the buyer can be left hanging trying to recover the money they paid.
I think your objection would be valid if, for example, they sued contractors that were paid to renovate Madoff's office (and being paid with customers' money).
But as it is, I think the veil of ignorance might serve as a guide. Consider: You are informed that, before his untimely death in a completely unnecessary re-enactment of Wilhelm Tell's apple-related stunts (only this time with LSD), your great-granduncle invested $10,000,000 of the profits made from his seminal literary addition to the comin-of-age canon into Madoff's funds. You do not know if he ever found the clarity of mind to withdraw any funds. Would you choose the $10 million, or prefer a 50% chance at $20 million?
(the diminishing marginal value of money also comes into play here).
No.
I don’t know if any of the 10 investments i made in 2018 are Ponzi schemes. I have to rely on regulations and hope companies like Lending Club are legit, I don’t pour over their paper work or hiring private investigators to figure out how they do their business. It would be silly to confiscate my profits because Lending Club turned out to be shady. Me hiring a fund to produce returns on investment is no different than hiring a painter to paint a room.
update
all good points in replies. i stand corrected on my understanding of this issue :)
Unwinding /anything/ from a decade ago is non-trivial.
It's even possible (likely?) that some direct Madoff investors were also customers of the funds that have money being clawed back.
They all are. That’s the point. This is taking Money from those who got out of Madoff’s fund soon enough, and giving to those later investors who paid for the imaginary profits.
> that some Madoff investors.
You omitted the word "direct" (why?)
Person X invests in a fund Y that invests with Madoff and gets out soon enough. Person X then invests those gains "directly" with Madoff. Person X loses money with Madoff. How much does Person X deserve (or owe)?
Another example would be Person A who invests $N in the scheme. Takes out $10N principal & profits (as a test that the scheme is authentic). Invests that $10N and even more in the scheme, loses it.
How much do you claw back for (or from?) Person A?
As to your examples:
Person X is irrelevant. You claw back the money from fund Y. Fund Y may, in turn, have arrangements with person X requiring them to return any money, but that's actually tangential. (this is like 1st-semester law again, yeay!)
Person A owes <total sum taken out> - <total sum put in> (this is like 10th grade math again. yeay!)
In real-world experience, rather than 10th-grade story problems, the devil is in the details. Dates are important (you're eligible for recovery of losses from date range, you're liable for recovery from other date range), and Person A is likely to be vulnerable to clawback of earlier profits, even if reinvested and later lost. The profits from the scheme are separate transactions from the later losses in the same scheme. In this case, your simple math would be more fair, but probably not how the legal system would work. Yay!
You can see examples of this in capital gains taxes on people who made and lost a lot in cryptocurrency boom/bust cycles. Arbiters may have a lot of discretion in evaluating claims in these big cases, but I'd rather have the law on my side than relying on the discretion of an arbiter.
the case for returning the property in this situation is more practical than moral. that is, it's probably just easier to just find the guy with the car and take it than to extract money from a deadbeat car salesman who probably doesn't have it anymore. I find these sorts of legal things distasteful, but I guess I can see why we have them.
in an ideal world, I think there should be some sort of safe harbor protection for people who make a reasonable effort in good faith to check that a transaction is bona fide.
Remember, you may be an innocent victim, but someone, somewhere, had the car stolen from them and they may not have had insurance on it.
In short, if the last purchaser got to keep the car, that means he would be less risk averse to buying from car dealers with risky reputations, effectively increasing the market for stolen cars. And this increase in the market would result in more stolen cars overall.
The existing default rule is, of course, based on a judgment that we won't be worse off in a world where people can fraudulently claim that their car is stolen and then get it back while also capturing the sale profit. Considering that most people are law abiding and have very good reason already to protect their car from theft regardless of which default rule we choose, it's not a bad rule on its face.
> in an ideal world, I think there should be some sort of safe harbor protection for people who make a reasonable effort in good faith to check that a transaction is bona fide.
It sounds like you may have a legal education given the language you're using. IIRC this is how the rule for real estate works in the presence of land registration systems. We flip the default rule to incentivize recordation. If two fraudulent sales are made by a seller back-to-back before title is recorded, it's the last purchaser who gets the property. This incentivizes each purchaser to record his purchase as quickly as possible, and to do so in a manner that closes the window for a fraudulent sale, such as by keeping payment in escrow until recordation is successful. (See, e.g., https://en.wikipedia.org/wiki/Bona_fide_purchaser)
https://en.wikipedia.org/wiki/Veil_of_ignorance
> "It would be silly to confiscate my profits because Lending Club turned out to be shady"
It would be even sillier for you to lose literally everything because Lending Club turned out to be shady.
Madoff's fund wasn't regulated, too. If you buy a house or stocks, you are into a regulated market.
Edit : by "regulated" I probably meant public. Not sure if the english term is correct ; one may want to check Shiller's course about hedge funds on youtube. My point being, those funds are only accessible to the very rich who will never spend their principal.
You...should probably do more diligence if you’re investing your money in Lending Club. Treasuries and CDS are the thoughtless investment option.
Put another way, they've constructed a but-for world where everyone just invested, but took no returns. Then they distribute everything that's available in proportion to those investments. So as a result, everyone simply lost the same percentage of their investment.
Isn't that fair?
What's confusing, I think, is the idea that they're somehow punishing people who withdrew profits. Because maybe they should have known that they were too good to be true. But I don't think that's relevant. They're just unwinding the thing.
Giving everyone back their capital is about as even-handed as you’re going to get.
Doesn't matter if we both invested in T-bills (or war bonds), corporate bonds, or equities.
Unfortunately it's never going to work out well for everyone - it was a massive fraud.
A crime was committed with numerous victims. It’s not possible to achieve a completely fair outcome for all involved.
I think that if you’re ever insentivized to be ignorant, then that suggests some ethical shenanigans. If someone like Madoff can live the charmed life he had and pay the price while other investors that profit from it can just keep the profits, it creates some very perverse incentives in the market.
So lets say it is unfair on both sides, but we want to come up with a policy that will optimize behavior in the future. What is the effect of this policy?
This is a fairly straightforward application of the principles behind the law of restitution and unjust enrichment. Here, an early Ponzi scheme participant was enriched at the expense of a later Ponzi scheme participant. The remedy is to disgorge the profits of the first so as to make the second whole again.
Here we're upset because we don't believe that the act of investing was 'unjust', but functionally being 'unjust' in this area doesn't necessarily mean 'wrong'. It can mean unjustified, or lacking a proper basis.
Viewed in this way, one's timing within the ambit of a Ponzi scheme would need to be the justification to entitle early participants to outsized profit. Should our legal system lend force to this type of arrangement, or unwind them as best it can?
You could have a similar thing happen without a scam.
Trying to get everyone back to their original investment is probably the best method overall, but it's a tradeoff.
Unless the entire funding structure including the currency and all parties in the transaction are completely anonymous and it is impossible to trace the funds to any one person, but then this raises further problems.
The lawyers don't seem to have had to prove that the investors knew that the fund was illegitimate at. My understanding is that the fund was regulated so the assumption should have been that it was legitimate.
I would not be surprised if results in people losing their retirement funds.
Generally, if you receive stolen goods, there are two possibilities: you knew they were stolen (read: a prosecutor can convince a jury you knew), in which case you lose the goods and get prosecuted. Or you didn't know they were stolen (read: prosecutors can't convince a jury you knew), in which case you merely lose the goods.
This may seem unfair from the perspective of the unknowing recipient of stolen goods, but letting them keep the goods is equally unfair from the perspective of the original victim, and would feel like the law giving its blessing to the theft (it would also encourage schemes to knowingly but with plausible deniability receive stolen goods). So there's no solution that is guaranteed to appear fair from all perspectives. But the law generally sides with returning the goods to the original owner, effectively undoing the original theft.
In this case, the "investors" who are being targeted by the suits are also getting to keep their own original capital; they're just being required to hand back the ill-gotten gains. So the remedy is effectively undoing the Ponzi scheme.
That also seems like the correct approach here where anyone running a feeder fund should be on the hook.
Though, I guess that changed over time and I now consider Amazon more a shady market stall.
Ultimately as a potential investor this would have been easy to spot as at least suspect. The first couple of due diligence questions to ask are about custody arrangements and their auditor. Understanding that if you are not an accredited investor you are not allowed to invest in hedge funds also makes it obvious that a fund willing to take your money may be acting fraudulently.
Finally it did result in people losing their retirement funds, for some people absolutely everything.
> Ultimately as a potential investor this would have been easy to spot as at least suspect.
You think that even after the SEC failed to spot the fraud investors with far less power should be able to? I don't quite follow your argument here. A little more clarification would be nice.
> Finally it did result in people losing their retirement funds, for some people absolutely everything.
Taking money that people have received 20 years ago off people will also result in some people losing everything. (I know that they say that the people they are extracting the money from are keeping the original investments but what if some of the money has been spent?)
https://en.wikipedia.org/wiki/David_G._Friehling
This is not to excuse the SEC or let them off the hook. The SEC proved to be ultimately grossly incompetent at best, if not negligent or actually complicit. Investors should no more rely on the SEC to protect them than the hens should rely on the fox to protect the henhouse. This has been demonstrated repeatedly.
https://www.barrons.com/articles/when-chinese-stock-fraud-wa... https://www.wsj.com/articles/SB123577641445497313
Finally there is a statute of limitations when clawing back money that people received. I believe in Madoff's case it was two years. Additionally there were a number of lawsuits against a subset of investors that allegedly new about the scheme and profited from it.
https://www.reuters.com/article/us-madoff-trustee-opinion/ju...
You are basically asking for the government to insure that nothing bad ever happens and accept unlimited liability if it ever does.