Investment nightmare

[Retireby45ish]

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.

My question is a bit complex.

I had invested taxable funds. Let’s call the amt 200k to make the math easy.

I then withdrew those funds and deposited the same amount through an IRA. So withdrew 300k (100k gain after 5 years) and put in 300k of different IRA money account I had. These were not same funds but I did the swap at the same time.

So now, a month later, the fund goes under and loses like 80%. They are trying to get more back for investors.

So now I get a letter saying “hey you banked a 100k profit so we want 50% of that back if you pay us in 30 days or else we will litigate for the full amt”. They said they treat IRA and my other account as separate entities (which is insane) so they do not offset even though they said tax id numbers would be used to aggregate those with multiple accounts. I’ve reached out to see why these accounts aren’t treated as offsetting since I’m the holder of both. They are clawing back money from me to pay me in my other account. Thought of the 50k I’ll probably get less than a penny of that back on the other IRA side.

What should I do?
I worry that paying an attorney to fight it might cost me enough where it’s worth just sending in 50k. I might ask for 25k settlement instead to see if they come down. But I doubt it.
Anyone know any lawyer that might give me some thoughts?

Thanks in advance for any help.

Lesson on diversification learned. This has been the saddest financial decision of my life. I didn’t get to write off losses in IRA and I paid taxes on all gains.

 

[tb001]

Is your ira invested with the same entity? I don’t understand how you can withdraw $ and they have any recourse at this point?

 

[Retireby45ish]

Is your ira invested with the same entity? I don’t understand how you can withdraw $ and they have any recourse at this point?

The Ira was invested through a holding company (similar to fidelity) and the regular funds were just wired over normally.

Yes I agree, I don’t see how they can come for it, yet they did

 

[jazz4cash]

I don’t know but it’s very interesting. I don’t see how you could put these funds into an IRA. It seems to me you could be liable for a clawback. 50% is probably a decent offer if there is a legitimate case of fraud (e.g. Ponzi) vs. bad investment choices by the founder or bad behavior because it’s not necessarily illegal. I don’t know but others with better insight will weigh in.

 

[ivinsfan]

Explain how you put 300K into an IRA...how many years did that take you? ..this makes no sense.


I know you picked a round number for example, but how much money was actually involved.

 

[pb4uski]

+1 What the OP wrote doesn't make sense... you can't just pop in $300k from taxable account into an IRA... there must be more to the story.

But for now I'll assume that for some unknown reason what they OP said is true. If there is significant time between when the $300k taxable account was withdrawn and $300k deposited into the IRA then the their position might have some credence.

If it was at the same time then it is stupid to view it as two transactions. The OP invested $200k and lost most of it so there is no gain to be clawed back.

You could even make the same argument if there was some time between the $300k withdrawal and the $300k deposit... soup-to-nuts the OP invested $200k and lost most of it so there is no gain to be clawed back.

Marginal cost is $200k... marginal revenue is not much... therefore an economic loss. Unless the law says differently (and it may) then economics should prevail.

I would get a lawyer and send them a letter explaining why you don't owe anything and then ignore all other communication until they file a lawsuit against you.... then get the lawyer involved again.

 

[Gallaher]

Seems like you could withdraw draw your cash, fly to Vegas for a lost weekend....”sorry, lost it”. Now what are they gonna do?
If they have shown you they are scammers, be bold to their scams.
Sounds like their advantage is to intimidate you.
You get to decide how you respond

 

[USGrant1962]

Explain how you put 300K into an IRA...how many years did that take you? ..this makes no sense.


I know you picked a round number for example, but how much money was actually involved.

I read OP as re-buying into the investment with an existing IRA, not funding the IRA. Still, a strange transaction.

 

[Retireby45ish]

I read OP as re-buying into the investment with an existing IRA, not funding the IRA. Still, a strange transaction.

This is correct. I had an existing IRA account money that I used to buy it at the same time that I sold the taxable account. It wasn’t the same money I took out.

I did so because the tax treatment on the gains was taxed as ordinary income so I wanted to make it more
Tax efficient…hence the IrA holding it rather than regular taxable cash.

 

[Retireby45ish]

+1 you can't just pop in $300k from taxable account into an IRA... there must be more to the story.

Sorry for not explaining it well. I clarified in post above.
This was an existing IRA account I had with funds. And at same time as removing cash I invested through my IRA (but not the same money).

 

[pb4uski]

Ah.. ok. So in your taxable account you sold $300k at a $100k gain... and in your taxable account you used $300k of cash to reinvest.

Was the sale and reinvestment done at the same time? If not, what was the time difference between the two transactions? Hours? Days? Weeks? Months?

 

[jazz4cash]

50% gain in 5 yrs is a decent return but I have no clue on the risk. Obviously it has turned out to be huge.

 

[tulak]

I read OP as re-buying into the investment with an existing IRA, not funding the IRA. Still, a strange transaction.

Could be, but in that case the OP should say he bought/sold the fund in taxable/IRA accounts. Using withdraw/deposit implies that money was transferred between accounts, which in this case is confusing.

I’m wondering who is asking for the money? Is this a government entity?

It sounds like a tough situation. I suspect you’d get something back for the 300k in losses, but that probably won’t happen until all the funds have been retrieved to determine how much can be given back to investors?

 

[pb4uski]

It is probably a trustee asking for the money.... like the guys that chased down Bernie Madoff's assets for the investors. It isn't uncommon to try to claw back gains... for example if the OP hadn't done the IRA piece then he would have clearly been $100k to the good and the trustee would try to clawback some of those gains for the other investors... same thing happened with Madoff.

... 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.

 

[ivinsfan]

I read OP as re-buying into the investment with an existing IRA, not funding the IRA. Still, a strange transaction.

Yes it could be that , that's the only logical answer. This just confuses the story because the fact he put in an IRA has no bearing. It's the buy, sell, buy they are looking at. However the fact he put all the money back into the same fund means he still had the same risk...so how did he bank a 100K in profit?

 

[jazz4cash]

Yeah. The OP leaves a lot of open issues so it’s tough to offer helpful responses. To be fair I missed many details that were provided. If I got this right you booked a 50% LT gain of $100k over 5 yrs. You swapped that out for an 80% loss of (.8*300k=) $240k that you cannot deduct. Losing 80% in such a short period sounds like speculation to say the least. Is there a class action?

 

[Sunset]

If I read OP's post correctly, OP put 200K into investment, then cashed out $300K and put back in $300K into the investment.

Since OP didn't cash out , OP could argue there was no profit, the receiver probably does not connect the two different funding sources.

I think OP should reply there is no profit, and show the investment of the $300K IRA money. Since the investment lost 80%, OP's net profit is really $ - 160K , so they owe OP money. (the $300K was originally $200K ignoring source of funding, which is how I derive OP is out $160K (plus taxes paid on the original now absent fake profit of $100K).

I wonder what the limits are on clawbacks, lots of investors over years are innocently making profits and being taxed on it.

 

[RunningBum]

So now I get a letter saying “hey you banked a 100k profit so we want 50% of that back if you pay us in 30 days or else we will litigate for the full amt”. They said they treat IRA and my other account as separate entities (which is insane) so they do not offset even though they said tax id numbers would be used to aggregate those with multiple accounts.

What should I do?

I would document the 80% loss on the $300K you invested with your IRA account. Point out that even though you made $100K in taxable, you lost $240K in your IRA and don't feel you should have money clawed back when you lost $140K overall between the two accounts.

 

[disneysteve]

If I read OP's post correctly, OP put 200K into investment, then cashed out $300K and put back in $300K into the investment.

Since OP didn't cash out , OP could argue there was no profit, the receiver probably does not connect the two different funding sources.

That's how I would read this as well. OP may need an attorney to sort it out though.

 

[ivinsfan]

If I read OP's post correctly, OP put 200K into investment, then cashed out $300K and put back in $300K into the investment.

Since OP didn't cash out , OP could argue there was no profit, the receiver probably does not connect the two different funding sources.

I think OP should reply there is no profit, and show the investment of the $300K IRA money. Since the investment lost 80%, OP's net profit is really $ - 160K , so they owe OP money. (the $300K was originally $200K ignoring source of funding, which is how I derive OP is out $160K (plus taxes paid on the original now absent fake profit of $100K).

I wonder what the limits are on clawbacks, lots of investors over years are innocently making profits and being taxed on it.

We don't know the time gap between the sell/buy but yes the math doesn't add up...apparently they told him the funds don't offset, he should get some clawback money on the extra 100K in profits whenever that happens. (or if it happens) I find it interesting they gave him a 50% discount which would lead me to doubt how much he would get paid out on the clawback settlement.

 

[pb4uski]

Bottom line, the OP invested $200k and at the end it was worth $60k (assuming 80% loss on the $300k)... so economically the OP had a $140k loss rather than a profit. What happened in between doesn't matter.

Actually the OP is even worse off economically since he had to pay taxes on the $100k gain but that is a side issue.

I think it is a strong argument either way, but if the sale and reinvestment occurred at about the same time it makes the argument stronger. ETA: OP later wrote that it was a week.

It seems like the trustee either doesn't have all the facts or is just trying to rattle the OPs cage in the hopes of recovering some money.

Time for the OP to hire a lawyer.

 

[Retireby45ish]

Yeah. The OP leaves a lot of open issues so it’s tough to offer helpful responses. To be fair I missed many details that were provided. If I got this right you booked a 50% LT gain of $100k over 5 yrs. You swapped that out for an 80% loss of (.8*300k=) $240k that you cannot deduct. Losing 80% in such a short period sounds like speculation to say the least. Is there a class action?

Thanks for the thoughts so far everyone. This has been a very sad, scary and difficult few years as the courts attempt to settle this mess.


Yes this has a lot of moving pieces so sorry for confusing.

I booked a 100k gain over 5 years.

I then swapped that money out and invested instead (using non comingled funds) through an IRA account I had for about the same $$ amt. (This happened in a week of one another.)

And yes, I can’t deduct the loss for tax purposes since it happened in IRA. This was the worst of both worlds.

They have appointed a court receiver who has hired a law firm to track down this part of the funds money for investors. They have tracked down and paid out about 20% of the investment (through other avenues already) and are only expecting 5-10% more at best by these remaining types of claw backs.

The key killer for me was that they are treating these as separate accounts even though they said they would group gains and losses by “taxpayer Id”. I would think my IRA and my taxable accounts have same taxpayer Id (SSN) but they are saying otherwise. !!

 

[SecondCor521]

The only sensible reading I have is that the OP invested $200K into a fund that turned out to be a Ponzi scheme in a taxable account, sold that taxable investment for a $100K gain at some point, then invested $300K into the same Ponzi fund inside their IRA with existing IRA monies. Then the fund crashed 80%.

I think it is like the Madoff case, where they're trying to get money back from those who benefitted from the Ponzi scheme (wittingly or unwittingly) for those who lost out (wittingly or unwittingly).

In the OP's case, he benefitted in his taxable account and lost out in his IRA. So what he probably can do is work with them to let them claw back some of his $100K gains and then *also* have a claim in his IRA against that same lawsuit / fund / situation. So his taxable account which unwittingly gained will have to give back, but his IRA which unwittingly suffered will get some of the benefit.

Since it was a Ponzi scheme, it'll likely be an overall loss, and since his investment in his IRA was the larger amount, he'll not have the benefit of a capital loss write off. And finally, any monies returned to injured investors (such as OP's IRA) will probably be later in time. Which is all rotten. But, whatever recovery his IRA will make will hopefully soften the blow somewhat.

 

[OldShooter]

You don't need SGOTI. You need a lawyer knowledgeable in bankruptcy law and a CPA knowledgeable in the tax aspects. These costs are typical investing tuition payments that we all have made from time to time. As a % of the money involved they are not big.

 

[Safire]

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.

My question is a bit complex.

I had invested taxable funds. Let’s call the amt 200k to make the math easy.

I then withdrew those funds and deposited the same amount through an IRA. So withdrew 300k (100k gain after 5 years) and put in 300k of different IRA money account I had. These were not same funds but I did the swap at the same time.

So now, a month later, the fund goes under and loses like 80%. They are trying to get more back for investors.

So now I get a letter saying “hey you banked a 100k profit so we want 50% of that back if you pay us in 30 days or else we will litigate for the full amt”. They said they treat IRA and my other account as separate entities (which is insane) so they do not offset even though they said tax id numbers would be used to aggregate those with multiple accounts.

What should I do?
I worry that paying an attorney to fight it might cost me enough where it’s worth just sending in 50k. I might ask for 25k settlement instead to see if they come down. But I doubt it.
Anyone know any lawyer that might give me some thoughts?

Thanks in advance for any help.

Lesson on diversification learned. This has been the saddest financial decision of my life. I didn’t get to write off losses in IRA and I paid taxes on all gains.

Who was the letter from? Was this from a bankruptcy trustee liquidating the trust assets to repay investors who lost money in the scheme?

I am not a lawyer but If this is a "claw back" demand, and you do not respond, then they will likely sue you to get the money back to distribute to those who lost everything in the scheme. Quite honestly, there may have been no profit and you simply got paid out of other investors' money, which you were not entitled to (Ponzi). I think you may need a securities lawyer to discuss your options here.

Your OP on the "swap" was confusing but I am assuming you meant that you invested two lots of money in the scheme. The first one was for $200K from a taxable a/c, on which you made a 100K net "profit". You then closed out that "investment", and then put in 300K "investment" back in the same Ponzi scheme but this time with IRA funds, and lost 80% of this money?

Yes, this is why the bankruptcy trustee is considering this as two separate "investments", one in which you made a 100K "gain", and the other in which you "lost" 160K (80% "loss" on 200K). S/he is now trying to claw back a portion of the "gain", even though you technically also "lost" money in the scheme.