Strategies to Minimize Damages From Madoff & Other Recent Investment Scandals

1. Strategies to Minimize Damages From Madoff & Other Recent Investment Scandals G. Robert Marcus Erin T. Welsh Gary N. Marks Morris S. Bauer Charles A. Bruder Melinda Fellner Bramwit John J. Eagan The material provided herein is for informational purposes only and is not intended as legal advice or counsel.

2. Please help yourself to food and drinks Please let us know if the roomtemperature is too hot or cold Bathrooms are located past the reception desk on the right Please turn OFF your cell phones Please complete and returnsurveys at the end of the seminar

3. Strategies to Deal with Madoff Losses That Are Not Available or Not Cost Effective • Joining a class action • Suing related Madoff parties individually • Trustee and big money will be chasing these people • Any action will be stayed by the U.S. attorney or the Bankruptcy Court • Suing the IRA or 401(k) administrators • Suing the SEC or the U.S. Government • Any action designed to change the IRS position that a theft loss deduction is unavailable to a retirement account

4. The Securities Investor Protection Corporation and Recovery of Customer Claims Erin T. Welsh

5. Overview of the Securities Investor Protection Corporation (“SIPC”) What is SIPC? SIPC’s Role SIPC’s Current Resources for Claims Types of Losses Covered Investment Products/Losses Not Covered

6. The Liquidation Proceeding • Customer Protection Proceeding • Bernard L. Madoff Investment Securities, LLC (“BLMIS”) • Placed in liquidation proceeding December 15, 2008 • Irving H. Picard appointed as Trustee • Trustee May Transfer Customer Accounts or Forward Securities and Cash to Customers • BLMIS accounts could not be transferred to another brokerage firm • Customer Claims • 8,000 claim forms sent to BLMIS investors • SIPC Trustee must determine whether claims are (1) “ascertainable” from the failed brokerage firm’s records or (2) established to the satisfaction of the SIPC Trustee

7. SIPC Claims • Who Should File a SIPC Claim? • Who is a “Customer”? • Multiple accounts • Feeder funds and other indirect investors • What is the Amount of Each Customer Claim? • Difference between total amount put into account and total amount taken out of account • What Documents Should be Filed With the Claim? • When Should a Claim Be Filed? • July 2, 2009 deadline

8. Satisfying Customer Claims • Customer Name Securities • Advancements from SIPC Fund • $500,000 limit per customer, including $100,000 for cash claims • Ratable Share of Customer Property • General Estate

9. Clawbacks • Trustee will seek to recover false profits from some customers • Factors Considered: • Size of investment and amount of fictitious profits at issue • Time period over which money was invested • Investor’s relationship with Madoff or other insiders • Review of account statements • Account activity and any other factors deemed appropriate by Trustee

10. Clawback Gary N. Marks Morris S. Bauer

11. How We Got Here • SEC files for preliminary and injunctive relief versus Madoff and Madoff Securities on 12/11/08 – Southern District of N.Y. • SIPC petitions Southern District to protect Madoff Securities customers under Securities Investors Protection Act (“SIPA”) on 12/15/08 • Federal District Court appoints Irving Picard as SIPA trustee and transfers liquidation proceedings to Bankruptcy Court • Judge Burton R. Lifland presiding in Bankruptcy Court. • Judge Lifland has previously addressed many issues that will likely arise in the Madoff case in another Ponzi case, Manhattan Investment Fund

12. Power and Authority for Trustee’s Clawback Powers • SIPA liquidations typically mirror liquidations under Chapter 7 of the Bankruptcy Code • SIPA expressly vests power in the Trustee to recover fraudulent transfers and preference payments • 11 USC § 547 • Permits the Trustee to recover preference payments made to creditors within 90 days of the petition • 11 USC § 548 • Bankruptcy Codes fraudulent transfer law • 2 year reach back period • 11 USC § 544 • Permits trustee to use applicable non-bankruptcy law to recover fraudulent transfers • Trustee may utilize provisions of New York Debtor and Creditor Law § 273-276 • New York’s fraudulent transfer law • 6 year reach back period • Compare: NJ and Fla 4 year reach backs

13. Constructive Fraudulent Transfer • A constructive fraudulent transfer is a transfer made for less than reasonably equivalent value or fair consideration by an entity that is insolvent or under capitalized • Investors are considered to have given reasonably equivalent value for their redemptions to the extent of their original investment • Example: Actual dollars in $100,000; redemptions within 6 years $100,000; real dollars and in equal dollars taken out; therefore, no fraudulent transfer since the redemptions were for reasonably equivalent value • Example: Same as above, except $200,000 redeemed within 6 years; reasonably equivalent value only to the extent of the original $100,000 invested; no reasonably equivalent value given for the excess; therefore $100,000 is recoverable as a fraudulent conveyance • Distinction between withdrawals of principal versus withdrawals of interest?

14. Actual Fraudulent Transfer • An actual fraudulent transfer is a transfer made with actual intent to “hinder, delay or defraud creditors” • One view (the Bayou case) • All transactions by Madoff are presumed to be with the intent to hinder, delay or defraud creditors • Even if investors are not guilty of any wrongdoing • No distinction between principal and interest • Alternative view: • Recovery as an actual fraudulent transfer requires fraudulent intent on the part of the redeeming investor • Example: Innocent investor; $100,000 invested; redemptions within 6 years are $200,000, half principal, half interest • Under Bayou – Presumed to be an actual fraud even if investor has done no wrong; all $200,000 recoverable as fraudulent transfer • Alternative – Since no fraudulent intent on investor’s part there is no actual fraud; only $100,000 recoverable by Trustee

15. Good Faith Defense • Shields transfers made for “reasonably equivalent value” or “fair consideration” • Applies to redemptions of principal • Fictitious profits of phantom income usually not subject to the defense • To assert defense investor must establish: • No “actual notice” of the fraudulent scheme • No “inquiry notice” • Objective test • Should reasonably prudent investor have been “on alert” and required to learn more • Investor who is on inquiry notice, makes diligent investigation and finds nothing can still avail himself of defense • In Madoff case, since SEC and sophisticated financial institutions could detect no fraud, a good faith defense by an individual investor could prevail

16. Subsequent Transferee Liability • Example: Investor in a feeder fund requests a redemption; feeder fund in turn redeems from Madoff and pays investor, • Principals of actual and constructive fraudulent transfer still apply, but • Those cases will be muddied with proof problems • Unclear whether Picard will attempt to extend his clawback power this far

17. The Clawback Pursuit • When? • 2 year statute of limitations from Commencement Date (December 15, 2008) to file clawback lawsuits • Who? • Unknown – Trustee states recipients of phantom income will be pursued. However, until the process is started, the Trustee still has the discretion to seek recovery from anyone who received payments.

18. The Clawback Pursuit (cont’d) • How? • Demand letters • Test case • Settlement guidelines • Trustee may file motion with the court under seal seeking approval of settlement parameters • Filing of complaints

19. Settlement Strategies • Negotiating settlements • Representation by counsel • Disclosure of personal financial condition, i.e. evidence of wherewithal or limitations on ability to repay the clawback claim • Waiver of proof of claim • Sympathy factor

20. Investment Losses and Tax-Deferred Accounts Charles A. Bruder

21. Tax-Deferred Investment Accounts – Issues Summary 1. Individual Retirement Accounts • No theft loss income tax deduction • Roth IRA exception • SIPC Claim 2. Defined Contribution Plan Accounts • No theft loss income tax deduction • After-tax contributions exception • SIPC Claim • Single claim or multiple claims? • Potential Fiduciary Liability

22. Tax-Deferred Investment Accounts – Issues Summary 3. Defined Benefit Plans • No theft loss income tax deduction • SIPC claim • Pension Benefit Guaranty Corporation (“PBGC”) • Potential fiduciary liability

23. Plan IRA/Participants Owners • Theft loss income tax deductions are not available for pre-tax funds • No basis in these amounts for income tax purposes • IRS: Plan participants/IRA owners receive the “tax benefit” of avoiding taxation on the income that would have been generated by these accounts • Question: Did you ever pay income taxes on any portion of your retirement plan/IRA?

24. IRA OwnersPossible Theft Loss Tax Deduction • Potential sources\ of theft loss income tax deduction • Roth IRAs • IRA which has been “converted” by the owner through the payment of income taxes on some portion (or all) of the account balance • As the owner has an income tax basis in the Roth IRA, a theft loss income tax deduction may be supportable • Limited to the amount of the income tax basis

25. IRA OwnersOther Sources of Potential Recovery • Third Party Liability • Asset custodian – FISERV • Investment Advisors/Managers • Investment Sales Representatives • Other professional advisors • SIPC Claim

26. Special Considerations – Defined Contribution Retirement Plans • SIPC Claim – Unresolved Issues • Possible theft loss tax deduction • Defined contribution plans which permit after-tax contributions • Must have been permitted under the terms of the plan • After-tax plan contributions = income tax basis • Theft loss income tax deduction will be limited to the income tax basis • After-tax contributions are not permissible for defined benefit (i.e., pension) plans

27. Special Considerations – Defined Benefit Plans • No theft loss income tax deduction • All pension funds are pre-tax employer contributions • SIPC Claim – filed on behalf of the defined benefit plan as a single account • No individual SIPC claims

28. Special Considerations – Defined Benefit Plans • Pension Benefit Guaranty Corporation (“PBGC”) • Inability to pay accrued plan benefits when due is a “Reportable Event” • Must file a PBGC Form 10 within 30 days of “knowing or having reason to know” that a Reportable Event has occurred • Failure to timely file may result in a loss of PBGC recovery • Maximum annual benefits – subject to adjustment • 2009 - $54,000 • 2008 - $51,750 • Potential subrogation claims for plan fiduciary/participants

29. Special Considerations – Retirement Plans • Plan Sponsors/Fiduciaries • Potential Areas of Liability • Breach of fiduciary duty • Failure to exercise due diligence in investment decisions • Failure to diversify investment funds • Self-Directed Plans: Failure to adequately inform participants of investment risks • Informed communication with plan participants is critical • Review fiduciary bond provisions for potential claim/exposure • Potential claims against third parties (i.e., asset custodians, investment managers, plan administrators, etc.)

30. Tax Impact John J. Eagan Melinda Fellner Bramwit

31. Income for 2008 Tax Year • February 5, 2009 Announcement by Irving Picard • Recommended Action For All Affected Taxpayers

32. Current Positions on Refund Claims-IRS Revenue Procedure 2009-20 IRS Revenue Ruling 2009-9 • Optional Safe Harbor Method • Illustration

33. Optional Safe Harbor Method: Hypothetical Basis Calculation and Theft Loss Calculation Bernard L Madoff Investment Securities LLC November 30, 2008 Account Balance (includes all previously taxed income) $ 2,500,000 Less 2008 earnings (no 1099) $ ( 200,000) Theft Loss Tax Basis $ 2,300,000 Subtractions 5% of 11/30/08 balance if no third party claims $ ( 115,000) (25% if third party claims) Reimbursement Claim-SIPC $ ( 500,000) Theft Loss Deduction $ 1,685,000

34. Current Positions on Refund Claims-IRS Revenue Procedure 2009-20 IRS Revenue Ruling 2009-9 • Optional Alternate Method • Illustration

35. Optional Alternate Method: Hypothetical Basis Calculation and Theft Loss Calculation Bernard L Madoff Investment Securities LLC November 30, 2008 Account Balance $ 2,500,000 Less 2008 earnings (no 1099) $ ( 200,000) Initial Theft Loss Tax Basis $ 2,300,000 Subtractions Reimbursement Claim-SIPC $ ( 500,000) Additional Subtractions 2005 earnings (eliminated by amended return) $ ( 200,000) 2006 earnings (eliminated by amended return) $ ( 200,000) 2007 earnings (eliminated by amended return $ ( 200,000) Theft Loss Deduction $ 1,200,000

36. State Law Views • New Jersey • New York

37. Net Operating Losses, Alternative Minimum Tax and Other Notable Issues • Mechanics of the NOL rules- potential 5 year carryback • AMT issues • Reportable Transactions

38. Recommended Action Plan • 2005-2007 - safe harbor without amended returns versus alternate method with amended returns and state effects • 2008 theft loss - alternative if you are in a refund position for taxes unrelated to Madoff • Claim optional NOL carryback for 2003-2007

39. Questions and AnswersThank you for coming!