Forced collection proceedings against a fraudster like Mr. Bernard Madoff can involve an extraordinary number of prospective plaintiffs with competing interests in the fraudster’s assets.  In Mr. Madoff’s case, some of these plaintiffs competing over assets might even include foreign governmental authorities seeking asset forfeiture because of Mr. Madoff’s money laundering in the United Kingdom or perhaps elsewhere.

Another prospective plaintiff in Mr. Madoff’s case, is Irving H. Picard, Trustee for the liquidation of Mr. Madoff’s assets on behalf of thousands of victims, pursuant to the Securities Investor Protection Act and the Court’s Order.  As "Madoff Trustee Seeks to Recover Assets in Gibraltar" reported, Mr. Picard just made a bankruptcy court filing seeking to retain special counsel to recover property in Gibraltar which belongs to Madoff.

Given all of the foregoing, I asked Swiss counsel to examine some of the complexities in pursuing forced collection proceedings against a fraudster like Mr. Madoff.  My discussion with Swiss counsel was based on the hypothetical that someone similar to Mr. Madoff had hidden assets in banks in Switzerland.  Swiss counsel’s comments are as follows:

"Complex forced collection proceedings may combine several competing recovery actions involving civil, criminal and administrative recovery remedies. To add to the complexity, these actions may be originated in various jurisdictions.


To take a concrete example, I am currently representing a client who was the victim of a fraud perpetrated in a far-eastern country. A criminal action against the perpetrator of the fraud was conducted in this country. The proceeds of the crime were transferred by the fraudster to the US where the fraudster managed to escape.


The fraudster was arrested at the request of the far-eastern country and sat in jail for three years for extradition purposes. Ultimately, he was extradited to that country and has now been sentenced to several years’ imprisonment.


The defrauded client chose to file a complaint for fraud, intentional misrepresentation, active concealment and several other counts including a RICO action against the fraudster in a Californian court.


The US attorney sought from a district court, an arrest warrant in rem of several assets in the US and also of funds deposited in a bank in Geneva.


The US Department of Justice sought judicial assistance from the Swiss authorities to enforce the arrest warrant in rem. Provisional measures were taken by the Swiss Federal Office of Justice blocking the funds on a provisional basis.


Meanwhile, the US district court rejected the action in rem essentially for procedural reasons. The court considered that the means of proof were insufficient essentially because the testimonies were not sworn according to US rules, although the testimonies were emanating from witnesses in the far-eastern country where the procedural rules are obviously different from the ones in California.


In Switzerland, the account holder challenged the interim blocking measure of his account on the grounds that the in rem action in the US was not equivalent to a criminal confiscation under Swiss law.


The Supreme Court ruled in an interim judgement that the in rem action as it exists in the US may be equivalent to a confiscation procedure under Swiss criminal law.


In order to avoid the risk that ultimately the Swiss authorities released the funds if the in rem action in the US was to be finally rejected by the US courts, the client decided to seek a civil attachment procedure in Geneva. The Court of First Instance granted the attachment but the appellate jurisdiction rejected it on the grounds that the US district court had rejected the in rem action sought by the US attorney and that therefore it was not evident that the client had a claim against the fraudster.


In order to avoid that the funds be released, the client filed for a criminal complaint for money laundering and the funds were then blocked under an order of the Attorney General in Geneva. The claim of money laundering is being investigated and the funds remain blocked.


Meanwhile, the fraudster had been extradited to the far-eastern country and sentenced to several years of imprisonment.


On the basis of this new fact, and for want of a final decision of the US courts as to whether the action in rem is enforceable or not, we are considering filing a new arrest request on the grounds that it is now established that the fraudster has finally been sentenced and that the funds blocked in Geneva have no other origin than from the criminal activity committed by the fraudster. It should be noted that the rules on asset tracing in Switzerland are less rigid than they are in the US and that therefore the chances of blocking, confiscating and recovering the funds in Switzerland look better than in the US.


In the instant matter, the far-eastern criminal prosecution authorities might have requested the confiscation of the assets by way of judicial assistance in the frame of the criminal investigation conducted in that country. They did not choose to do so, mainly because of ignorance of the rules of international judicial assistance. If they had chosen to do so, Switzerland would most likely have returned the funds to that country, rather than to the US because the far-eastern jurisdiction had primary jurisdiction over the case. It could have been however that the US authorities would have succeeded in obtaining the proceeds under the judicial assistance request since they were the first country to request judicial assistance from Switzerland.


In presence of competing claims, the criminal arrest has precedence over the civil arrest.


To complicate the issue, you might even imagine that the fraudster filed for bankruptcy in which case the receiver may try to block the funds by extending the effects of receivership to Switzerland. Swiss international private law allows for the enforcement of foreign bankruptcy in Switzerland on the assets belonging to the bankrupt estates in Switzerland. However in such a case, if the funds to be blocked have a criminal origin, they will be confiscated and will serve primarily to indemnify the victims of the fraud.


The funds confiscated under Swiss criminal investigations will normally be shared only among the plaintiffs who take part in the criminal action. If there is a competition between a civil attachment and a criminal attachment, the criminal attachment will have precedence over the civil attachment and also over a claim which may be asserted by the receiver of the bankrupt estate who enforced the bankruptcy on the assets found in Switzerland.


As you can see, the issues at stake are extremely complex. The bottom line however, is that the plaintiff who can establish that he has been the victim of a criminal act has better title to the assets as long as it can be established that the assets are the proceeds of the crime."

Copyright 2009 Fred L. Abrams