Investors with Bernard Madoff who withdrew their money before the world's largest investment fraud should not celebrate their good fortune. According to Bloomberg News' Ann Woolner, these people may be sucked into the scandal even if they had no intention of ripping anyone off.
"Investors who benefit from fraud, even if they knew nothing of any misdeeds, can be called on to return the fictitious earnings from their investments, even their principal if they redeemed it before the fraud was exposed," Woolner writes. "That money would be added to Madoff assets, to be divvied up among creditors, including the very same investors who had been forced to contribute to the pool."
Remember, the Madoff investors who did not get wiped out benefited (unknowingly) from the proceeds of a fraud. They did not earn legitimate profits.
The question is what should happen next. Should the lucky Madoff investors be able to keep their gains even if technically they don't deserve them? I don't know. I am not a lawyer nor am I a clergyman. These are going to be tough, heart-breaking decisions.
But it seems to me that the Madoff "haves" are going to be called to help the "have-nots." Remember, Madoff's victims will be lucky if a fraction of their money is recovered. They still have not recouped all of money that people lost in Sam Israel's Bayou Fund.
The pain for Madoff's investors will last years.