06/03/2011 12:35 pm ET Updated Aug 03, 2011

Ponzi Proprieties

"It is with a pious fraud as with a bad action; it begets a calamitous necessity of going on."
-- Thomas Paine, The Age of Reason.

One of the questions being asked with increasing regularity is what is the polite thing to do when you have benefitted from the actions of someone running a Ponzi scheme. In one case it may be that you invested and got remarkable returns, and in another it may be that you were not an investor, but the recipient of the funds that the Ponzi schemer stole. Herewith two different answers to that question. But first, a word about the process itself.

Let us assume that you invested $100 with Bernie Madoff 10 years ago, and for the last 10 years have been getting a 30 percent return on the investment. Now you learn that in the years after you made your first investment, Mr. Madoff convinced everyone in your neighborhood to give him $100 to invest, and he used that to pay you. Once that became known, of course, your neighbors were upset. The courts were also upset and appointed someone called a receiver to try to recoup for your neighbors the profits on the $100 investment you and other early investors made. Early investors were not the only beneficiaries of Ponzi schemes. Sometimes the schemer gave money he collected to charities, or even politicians, for political purposes.

Irving Picard is the court-appointed trustee of the Madoff mess that was uncovered on December 8, 2008. To date, Mr. Picard has recovered almost one half of the estimated $20 billion lost by Madoff investors. A good chunk of what Mr. Picard has collected to date comes from the widow of Jeffry M. Picower. Mr. Picower had invested with Mr. Madoff for more than 30 years. Ms. Picower agreed to return $7.2 billion to the fund. In a statement accompanying her agreement to pay, she said:

On behalf of my late husband Jeffry and his estate, I am announcing today that we... will return every penny received from almost 35 years of investing with Bernard Madoff, an amount totaling $7.2 billion that will go to the Madoff victims' compensation fund. Although it is my understanding that the estate's legal liability may not have exceeded $2.4 billion, I believe that this settlement honors what Jeffry would have wanted... I believe that the Madoff Ponzi scheme was deplorable and I am deeply saddened by the tragic impact it continues to have on the lives of its victims. It is my hope that this settlement will ease that suffering.

Not everyone is concerned about victims.

Ralph Janvey is a Dallas lawyer. He is the receiver for Stanford Financial Group that was run by R. Allen Stanford. In early 2009, it was learned that Mr. Stanford had stolen more than $7 billion from investors in 114 countries in a Ponzi scheme. Mr. Janvey, like Mr. Picard, is charged with trying to recover that money for the victims of the fraud. To date, Mr. Janvey has recovered less than $200 million. Part of his problem is the kinds of people who benefitted from the scheme before it was uncovered. They were not all investors. Some of them were members of Congress and the Democratic and Republican National Committees, to whom Mr. Stanford made contributions.

They were not eager to return the funds they had received. According to the Washington Post: "At least 50 members of the House and Senate have either ignored restitution demands or donated some of Stanford's campaign contributions to charity instead... " Included among the refuseniks are Eric Cantor, the House Majority Leader, Charles Schumer, the chairman of the Senate Rules Committee, Senator Bill Nelson who chairs a Finance Committee subcommittee and Senator John Cornyn, a member of the Judiciary Committee.

Senator Cornyn explained that, when he learned of the Ponzi-like character of the Stanford operation, he donated the money he'd received to charity. Senator Cornyn comes from Texas. According to one victims' group, 1,300 Texans invested with Stanford and lost $582 million that the receiver is trying to recover. The 1,300 probably feel a lot better knowing that Mr. Cornyn gave the funds that rightfully belonged to them to charity instead of to the receiver, who could have distributed it back to them. Senator Nelson told the Post he had given the money he received to charity but was now preparing to write a check to the receiver. Mr. Cantor said he'd give back the money if the receiver gave him a release. It isn't clear what he wants to be released from. The political fundraising committees are less tractable. According to the Post, "four of the principal national Republican and Democratic fundraising committees took in $1.6 million in Stanford donations," that they have refused to disgorge and over which they are now fighting with the receiver.

It's too bad the beneficiaries of the Stanford scam didn't have among their number people of the caliber of Ms. Picower. If there were, the receiver might have recovered more than a paltry $200 million. Indeed, it's too bad there aren't more people with a moral compass like that possessed by Ms. Picower living among us.

Christopher Brauchli can be emailed at For political commentary see his Web page.