"Deductibility of Losses in a Ponzi Scheme"

On December 11, 2008, Bernard Madoff, a decades-long veteran of Wall Street and pillar of the US financial community, was arrested for allegedly running a giant Ponzi scheme or pyramid fraud. Prosecutors have alleged that Mr. Madoff confessed to losing approximately 50 billion dollars in the scheme. The Securities and Exchange Commission alleges that Mr. Madoff delivered consistently strong returns by secretly using the principal from new investors to make income and redemption payments to other investors. The scheme appears to have unraveled as more investors asked for redemptions in late 2008. In the coming weeks and months, much will be written about the allegations against Mr. Madoff. This Stroock Special Bulletin has a narrower focus: it addresses, in general terms, whether and when taxpayers may deduct losses suffered in connection with a Ponzi scheme.