THE BLOG
06/05/2009 05:12 am ET | Updated May 25, 2011

Honey, I Shrunk the Kids' Allowance

Irving Picard means business. He's the trustee in the Madoff affair. On May 1, 2009 he sued the entire Chais family for return of funds invested with Bernie Madoff: spouse, children, and grandchildren.

No relation to the chaise longue.

Picard, no doubt, is under performance pressure. He announced the recovery of $1 billion in assets. There's still $64 billion that's missing in the Madoff Ponzi scheme.

The patriarch, Stanley Chais, is no ordinary investor. He is a money manager. His partnerships -- Popham, Lambeth, and Brighton -- served as feeder funds for Madoff. The Chais family, according to The New York Times, withdrew over $1 billion from their Madoff accounts since 1995.

Plenty of feeding there.

Two items caught my attention. The trustee alleges the defendants knew their returns were "implausibly high." According to the complaint, the Chais family averaged returns of about 40 percent. Chais' clients averaged only 20 to 25 percent, though. And most Madoff investors averaged even less, around 12 percent.

Hmmm.

The courts can determine what Chais knew and when he knew it. Madoff's preferential treatment of some investors, however, is a big deal. It's a likely blueprint, I think, of the trustee's legal tactics. Charges of preferential treatment probably give Picard more power to claw back funds. No doubt, we'll see this strategy again.

Naming the children and grandchildren -- specifically their trust accounts -- is especially interesting. For years, I heard lawyers say, "Estate planning offers additional protection from creditors and litigation-hungry predators." The basic concept is the more entities, the more difficult it is to purse legal action.

We'll see.

I tried counting the number of entities in the court documents -- almost fell asleep in the process. The trustee listed every family member and trust in sight. There must be over 100. In the months to come, we'll see how much protection all those accounts offer from creditors.

But average returns of 40 percent over 30 years.... I suspect all the estate planning in the world will offer scant protection when the returns are too good to be true.

My prediction: allowances will be clawed back.