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Minnesota Law Review

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Months after insurance giant American International Group (AIG) faltered and the federal government provided financial assistance to keep the company afloat, executive compensation and bonus practices at the company came under scrutiny. Taxpayers balked when evidence came to light that large bonuses were being paid to executives—the same executives, in certain instances, who had been responsible for AIG's losses. The disconnect between AIG's huge losses and the multi-million dollar bonus payments is a striking example of "pay without performance," a phenomenon that Professors Jesse Fried and Lucian Bebchuk documented in their book of the same name. Responding to public outrage, the House of Representatives sought to impose a retroactive marginal taxation rate of ninety percent on the AIG bonuses (as of the date of this writing, the bonus tax had passed in the House of Representatives, but not the Senate). During the debate over the bonus tax, both legislators and media alike described the pending bill as a "clawback" provision.

The same term—"clawback"—has been used to refer to remedies potentially available to defrauded investors in a Ponzi scheme. For over a decade, the former director of NASDAQ, Bernard Madoff, had been pretending to operate a hedge fund that turned out to be one immense house of cards. The fraud robbed investors, including some charitable institutions, of billions of dollars and created a crisis of confidence in the capital markets. In Madoff's fund, there was in reality no investment strategy to provide "hedges" against typical forms of risk. Indeed, there did not even appear to have been any trading of stock for over a decade. Rather, as in a textbook Ponzi scheme, the early investors were bought off with the money from the later investors. In turn, the payouts to the early investors were relied upon as proof of profitability to convince later investors that returns were legitimate. Because Madoff and his "hedge fund" are now insolvent, the question has arisen as to whether the bankruptcy trustee may bring a "clawback" action on behalf of the later investors to recover the profits of the early investors.



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