Long Island law and accounting firms are bracing for an onslaught of clients who are casualties of Bernard Madoff’s Ponzi scheme by setting up task forces, hotlines and class actions.
“Right now there is a lot of uncertainty, said Stephen M. Breitstone, head of the tax department at Meltzer Lippe. “There is no question this is enormously fertile ground for lawyers. We need to figure out the best way to represent our clients.”
Added Mark Mulholland, partner in charge of the litigation practice for Ruskin, Moscou Faltischek, “this is a scandal of stunning proportions.” Ruskin, Moscou filed a class action lawsuit against Madoff on behalf of a number of Long Island victims. “This dwarfs Enron, Worldcom and any scandal I’ve ever seen.”
Mulholland said, in addition to the class action, which has been stayed by the Southern District Bankruptcy Court, the firm will also go after any hedge funds or money managers that profited from the fictitious interest accrued on the victims’ investments.
“We’re not sure what they knew,” Mulholland said. “As a matter of sound public policy, no one should be allowed to profit from a Ponzi scheme.”
Michael Greenwald, partner-in-charge of tax services in Marcum & Kliegman’s New York City office, said no one knows how much managers, or anyone else for that matter, knew.
“No one has real access to the documents,” he said.
Greenwald suggests that victims gather as much documentation as they can from their accountants detailing how much was invested and for how long. That will help determine how much could be recovered, Greenwald said.
Breitstone said he is working with the IRS to see if there could be relief there.
“These people all paid taxes all these years on income that wasn’t real,” he said. “Now they’ve got nothing.”
He said that filing a class action like Ruskin, Moscou’s was premature. Instead, he said Meltzer Lippe set up a multidisciplinary task force that includes bankruptcy, corporate, litigation and tax practice groups.
Other prominent Long Island firms such as Berdon, Meyer, Suozzi, English & Klein and Grassi & Co. also set up Madoff task forces.
Kevin Schlosser, partner and head of the litigation department at Meyer, Suozzi, said they are exploring Securities and Exchange Commission enforcement activity, bankruptcy court proceedings, civil lawsuits and class actions on behalf of the firm’s clients.
“We are monitoring the full spectrum of forums and remedies to determine which avenue will be best for any clients,” Schlosser said
One of the most challenging issues with the Madoff scandal is the large number of victims, each of which have their own heartbreaking story.
Greenwald said he has talked to many clients who are totally wiped out. He said for every Mort Zuckerman, Fred Wilpon and Stephen Spielberg, there are more than twice as many victims who are “not wealthy by traditional standards.”
They are clients who had access to money, such as an inheritance or a trust, which they invested with Madoff for the consistent returns. They were living on that money, relying on it to cover mortgage and car payments, and even food and other daily expenses.
Mulholland added that many lawyers at Ruskin, Moscou also seem to be serving as grief counselors for the clients. He said they all have emotional, gut-wrenching stories to tell about how much money they lost.
“Folks who are rich are now penniless,” he said. “There’s not much they can do. Some of them are selling their homes. Some are re-evaluating how they live in order to survive. Their entire lives are in upheaval.”
But Breitstone said many could have staved off this disaster if they just followed the time-honored golden rule of investing: diversify.
He said he expressed reservations over the years when clients came to him with large Madoff portfolios that were not diversified.
“I wouldn’t put all my money in one place,” Breitstone said. “Clients with a large amount of investments need to spread them out between all the major financial institutions. You just never know. Any clients who put all their money in Madoff made a terrible business judgment. Diversification is absolutely critical.”