Could Madoff Clawbacks Hit Fort Worth Pension?

Five years ago, the $1.3 billion fund Fort Worth invested $7.5 million in Rye Select Broad Market, a hedge fund managed by the Tremont Group – and one that invested most of its money with Bernie Madoff’s firm, according to the Fort Worth Star-Telegram.   Madoff is alleged to have masterminded a $50 billion Ponzi scheme that has wiped out investors of all shapes and sizes, including several pension funds (see  List of Pension Funds Claiming Madoff Losses Grows ,  List of Retirement Plan Victims of Madoff Scheme Grows ).

The Fort Worth fund wouldn’t seem to be in that category, since its board unanimously voted to drop the Rye Fund way back in July, getting back both its original investment and $2.5 million in earnings.

Clawback Clause?

But a BusinessWeek report suggests that the Fort Worth plan and other Madoff investors who got out before the operation imploded may yet be snared by the bankruptcy proceedings.   The report notes that under federal law the trustee can sue former investors to force them to return their profits and principal, a.k.a. a “clawback.”  

Those skeptical of the likelihood of such an approach need look no further than the case of the Bayou Group, a $450 million hedge fund whose managers were convicted of conspiracy and fraud in 2005. The trustee in those proceedings filed more than 130 suits against investors who had pulled money from the fund within the prior six years, according to BusinessWeek.   Arguing that former clients should have to share equally in the pain.  

At the time Bayou trustee Jeff Marwil, a partner with the law firm Jenner & Block, said “It is patently unfair that certain former investors received all of their money back, plus profit, while other investors received nothing” (see  Hedge Fund Firm Charged with Fraud Files Bankruptcy ).   In that case, the judge ruled in his favor.

There are distinctions between the two cases; many of the Madoff investments were made indirectly, through so-called “feeder” funds, rather than direct investments as in the Bayou case.   Nor is there any suggestion of   insider information that led to the decision of the Fort Worth fund to liquidate the investment.   In fact, the decision to liquidate the investment came at the specific recommendation of investment consultant Albourne Partners.