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Some Madoff clients lay low to avoid lawsuits

NEW YORK (Reuters) - Many of Bernard Madoff’s oldest clients are shying away from trying to tap into a special reserve fund for defrauded investors, worried that filing a claim could open them to a legal fight seeking the return of their past profits.

These clients are in a unique situation: They actually made money over the years on their Madoff portfolios, often never touching their original investment but slowly getting paid their purported investment gains over time to pay living expenses like their home mortgage or a child’s school tuition.

Some had invested with the accused swindler for decades, and for years received distributions that now appear to have been based on fictitious returns.

These investors fear that the court-appointed trustee overseeing Madoff’s U.S. operations could seek the return of some of their past profits to compensate others hurt in the purported $50 billion fraud.

How the trustee will deal with their situation is one of the biggest questions among distraught Madoff investors. Lawyers who specialize in investor litigation say Madoff clients are flooding them with calls for advice.

Some lawyers say the best strategy for these investors, at least for now, may be to lay low and not seek financial help from the Securities Investor Protection Corp, which maintains a special reserve fund to help investors and is working with the Madoff firm trustee.

“My advice so far is they should wait until more information is available,” said Brian Neville, an attorney at law firm Lax & Neville LLP in New York. “Many of these people are beside themselves with this decision.”

Madoff investors face a March 4 filing deadline to apply for up to $500,000 in aid from SIPC, set up by Congress to maintain a fund to help investors with accounts at brokerage firms that have failed.

SIPC President Stephen Harbeck told Reuters on Friday that staff from his group and the U.S. Securities and Exchange Commission have met to determine the best way to settle claims but that no formal decision had been made.

He said the Madoff firm trustee is poring over claims from Madoff clients and has started classifying them.

A ‘ROAD MAP’ TO PAST PROFITS?

At a forum on the Madoff case this week, sponsored by accounting firm Holtz Rubenstein Reminick, one woman stood and asked the assembled tax and legal experts what she had to gain by filing a claim with SIPC.

She said she had been advised by some lawyers not to bring a claim because doing so could provide “a road map” for the Madoff firm trustee as he weighs whether to bring lawsuits against investors seeking the return of their past profits.

The woman, who declined to be identified during or after the meeting, told Reuters that she had inherited her Madoff account from her late husband, who had been a long-standing client of the money manager.

Madoff was arrested last month and charged with securities fraud after authorities said he had confessed to a $50 billion Ponzi scheme, a scam in which earlier investors who withdraw money are paid with money put in by later investors.

A legal concept known as “fraudulent conveyance” presents Madoff investors with their dilemma in how to proceed with any possible claims of their own. If they pulled their money out they could be forced to return profits, or even possibly some of their initial investments, to help offset others who lost money in the purported fraud.

Neville said that many Madoff clients in jeopardy of having to return funds are senior citizens who are far from wealthy.

He said his clients include older people who have used the gains on their Madoff accounts, which they often seeded with a small original investment, to pay their living expenses. With their remaining investment now gone, some are being forced to raise cash by selling their only asset -- their homes -- in the worst housing market in years, he said.

Another legal expert, Hofstra University business law professor Ronald Colombo, said he thinks investors should not try to hide from the trustee and keep past profits a secret.

Speaking at the forum this week, he said the trustee could always seek an investor’s account records through a subpoena, so in the meantime Madoff clients should at least see if they are eligible to tap into SIPC’s reserve fund.

“I don’t see the harm in trying,” he said.

Additional reporting by Rachelle Younglai in Washington; Editing by Tim Dobbyn

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