Investment nightmare

[Retireby45ish]

Two mistakes. The first one was the initial investment. The second was coming to an internet forum seeking advice on how to deal with it. Greed is not always good. The first rule of investing is avoid the big mistakes. Sorry to be harsh but if I were in this situation I would be ill. Now spend a few bucks and get some real professional advice and move on.

Thanks.

Fwiw the confusion on % loss seems to be how we define the investment. As the OP I think of it as never having had more than 300k there invested so it’s a harsher loss % as the loss % on 300k is way bigger than those who are saying it’s on $500k. It’s all mechanics.

Well at least I spurred some discussion. Hopefully my misfortune is a learning opportunity for those who look for diversification but take on these oftentimes invisible tail risks. I’m sure this wasn’t the riskiest thing in the world but I got burned. In fact the reason I invested was it returned about 10% annually with very little volatility since they lended to a huge number of individuals and institutions. 900M fund, so not some fly by night operation.

 

[NW-Bound]

A few years ago before finding this board I invested in a fund that did lending to small businesses.

Long and sad story short it went south after a few years of nice returns. it was a 900M fund that turned into a Ponzi scheme by the greedy founder.

About 20 years ago, a guy at work told me of an investment like the above. The return was something like 10%/year, and the nature of the business was making short-term loans to businesses that had good account receivables, but needed access to cash now. Low, low risk he said. Also said he already received some good dividends, hence was looking to put more money in.

Sounded too good to be true, so I did not join in. Some time later, read about it being a Ponzi scheme. I did not ask the guy how much money he lost.

 

[foxfirev5]

Thanks.

Fwiw the confusion on % loss seems to be how we define the investment. As the OP I think of it as never having had more than 300k there invested so it’s a harsher loss % as the loss % on 300k is way bigger than those who are saying it’s on $500k. It’s all mechanics.

Well at least I spurred some discussion. Hopefully my misfortune is a learning opportunity for those who look for diversification but take on these oftentimes invisible tail risks. I’m sure this wasn’t the riskiest thing in the world but I got burned. In fact the reason I invested was it returned about 10% annually with very little volatility since they lended to a huge number of individuals and institutions. 900M fund, so not some fly by night operation.

Yeah. I get it. I really don't handle raw deals very well. I saw your situation and reacted with my old street upbringing. I'm sure I've lost more in opportunity costs related to my relatively conservative approach. Anyway, good luck and all the best.

 

[Retireby45ish]

Yeah. I get it. I really don't handle raw deals very well. I saw your situation and reacted with my old street upbringing. I'm sure I've lost more opportunity costs related to my relatively conservative approach. Anyway, good luck and I hope it works out .

And we haven’t even discussed the opportunity cost that was lost as well. If I’d had that money in the market the 200k would have been something north of 450k by now by my approximation. Ew.

 

[ivinsfan]

No, the are not. Here are his cash flows:

Day 1: -$200k
In the middle: +$300k, -$300k
Lastly: +$60k

Economic loss is $140k... $200k invested less $60k received.

Wait RB clearly says he lost 140,.. is it the method you disagree with?

 

[ivinsfan]

To the loss add taxes paid on the $100k gain, and a claim for $50K, and it looks like he’s lost the entire initial investment.

If the loss in the IRA is technically the result of fraud, and not investment loss, it should be deductible. The $50k clawback might also be deductible.

I suspect an attorney at this stage will be good money going after bad, with little hope for an improved outcome. That new money might be better spent on a tax expert.

We don't know he is going to have to pay 50K....say they consider this two completely different accounts. Would his IRA account which was open at the time of the crash presumably get some of the last rounds of clawback money?

 

[Safire]

That he had $500k invested. He only had $200k invested.



And for the record, I am a retired CPA... 17 years with two of the Big 4 firms.

I see it as two different transactions, not one. In any case, we agree on the net result of a 140K loss. In addition, my calculations factor in the taxes he paid on the "gain", surely he's entitled to get a portion of that back, which won't happen if you consider this as one net transaction?

The trustee probably sees his loss as a smaller loss and not the 70% loss you see it. Hence the attempts at claw back in order to "even out" the losses across the board. What ultimately matters is not two random strangers arguing over what a 3rd strangers losses are, but how the bankruptcy trustee sees it.

 

[pb4uski]

I see it as two different transactions, not one. ...

That's fine... I just think you are incorrect on that part. It might well be treated combined/economically for settlement purposes and separately for tax purposes since taxable accounts and tax-deferred accounts are treated separately for tax purposes.

Percentages are irrelevant. Repeated from post #14 snipet from WSJ on Madoff workout:

...Mr. Picard won a key legal victory in August 2011, when the Second Circuit upheld the method he and his team devised to determine how to handle claims. Madoff investors who took out more money from the fund than they deposited would have no claim, and would instead be liable to return their Ponzi-inflated gains. Only net losers would receive payments from money recovered by the trustee. ...

Also, the OP stated that some of the materials that he received from the trustee would look at things combined for a TIN which makes sense and is consistent with the WSJ quote.

If OP has a good lawyer it seems like the most likely outcome is that he will successfully defend against the trustee's attempt to clawback $50k and pay $0... and he'll get a theft loss deduction of $240k...$100k of the theft loss offsets the $100k capital gain that he previously recognized and paid tax on and the remaining $140k is the economic loss and he'll get a theft loss deduction for that too.

And attorney's fees.

That's my crystal ball.

 

[Safire]

That's fine... I just think you are incorrect on that part. It might well be treated combined/economically for settlement purposes and separately for tax purposes since taxable accounts and tax-deferred accounts are treated separately for tax purposes.

Percentages are irrelevant. Repeated from post #14 snipet from WSJ on Madoff workout:



Also, the OP stated that some of the materials that he received from the trustee would look at things combined for a TIN which makes sense and is consistent with the WSJ quote.

If OP has a good lawyer it seems like the most likely outcome is that he will successfully defend against the trustee's attempt to clawback $50k and pay $0... and he'll get a theft loss deduction of $240k...$100k of the theft loss offsets the $100k capital gain that he previously recognized and paid tax on and the remaining $140k is the economic loss and he'll get a theft loss deduction for that too.

And attorney's fees.

That's my crystal ball.

That would be the best outcome, under the circumstances.

 

[pb4uski]

Agreed... and still a very expensive lesson.

 

[Retireby45ish]

Agreed... and still a very expensive lesson.

+1000000000

(The OP)

When the sting wears off and I decide a path I’ll post how it all worked out. Thanks all.

I also checked my spreadsheet just now and ran another FireCalc to make me feel good about being on track to retiring in 1 or 2 years (even despite this major misstep in life).

 

[sengsational]

Forget about the $300k swaperoni in the middle. That is just an unnecessary distraction.

He put in $200k and ended up getting $60k back, so he has an economic loss of $140k.

...For tax law, he had a taxable event. I don’t know that tax law is relevant to this situation...

I agree with you guys. All of the tax perspective stuff is irrelevant.

And I also suggest that one does not need a lawyer to challenge the severed transactions sets. As I said before, you make a demand letter that forces them to reply, in writing, as to their justification for severing the transactions from a single individual. If it's BS, you take it to the judge yourself in a second letter. If all that fails, and it's going to cost you less to fight it than pay it, then get a lawyer. But I certainly wouldn't give up because some bozo said over the phone that I'm on the hook to pay when I'm not.

 

[OldShooter]

... I'd write a letter myself stating the facts of the case, the two account numbers, the dates of the transactions. Then demand all of this is treated as a unit with the threat of taking it to the presiding judge if they don't comply. ...

Somehow I don't see the bankruptcy trustee shaking in his boots at this kind of a threat from a pipsqueek creditor.

I don't see how they can justify severing the two accounts, and one must presume a reasonable judge would also wonder the same thing.

IANAL, but I think the two accounts have different legal owners: the OP as an individual, and his broker as trustee for the retirement account. So that may be the reason.

But I doubt the judge will every wonder about this at all. Any letter from the OP will be probably read by the judge's law clerk and filed with all the other amateur lawyering letters.

As an aside, The OP said that they were trying to get more for those that got ripped off, and this demand received is exact that.

Yes. IOW, the trustee is doing exactly what the law requires him to do. No news there. That is how bankruptcy works. Remember, too, that the trustee doesn't benefit from any of the money he collects.

 

[pb4uski]

^^^^ I totally disagree with every single thing in your post. The law requires the trustee to pursue all legitimate ill-gotten gains, not to maximize recoveries by shaking down investors like a mafioso. I'm guessing that the trustee might not understand the OPs situation.

Also, the TIN would be the same for both accounts so I don't know how anyone could think that they are different owners.

 

[OldShooter]

^^^^ I totally disagree with every single thing in your post.

The law requires the trustee to pursue all legitimate ill-gotten gains, not to maximize recoveries by shaking down investors like a mafioso.

Probably in the eye of the beholder. From press reports, the Madoff trustee did not make very many friends, but he recovered a lot of money.

I'm guessing that the trustee might not understand the OPs situation.

Agree. A little guy like the OP is just a few magnetic dots and spots on a disk drive somewhere. He is not getting any kind of a personalized look, at least not yet. I still think his best chance will come from getting good legal advice.

Also, the TIN would be the same for both accounts so I don't know how anyone could think that they are different owners.

I dunno. I was just speculating. Certainly the two accounts were segregated on the Ponzi's books.

 

[MichaelB]

I'm guessing that the trustee might not understand the OPs situation.

This is quite likely IMO. In addition, trustee is charged with recovering funds and probably views an unusual situation like this with skepticism, and least initially.