Madoff Exposure Spreads to Labor Union Pension Funds

By Charlie Gasparino
|  Monday, Jan 11, 2010  |  Updated 8:42 AM PDT
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The financial carnage coming out of the Bernard Madoff investment scandal is now spreading from charities and wealthy individuals to labor union pension funds. In recent days, several have fessed up to their members their significant exposure to Madoff's investment scheme, which will result in massive losses to their members.

CNBC has learned that one union, the Carpenters local in Syracuse, N.Y., has lost the majority of the $100 million to $150 million it had in pension money because of its dealings with Madoff, people close to the matter said. The union's money manager, J.P. Jeanneret Associates of Syracuse, didn't return a telephone call for comment.

The Syracuse carpenters local isn't alone. Pat Morin, business manager of Empire State Carpenters Union, is sifting through the wreckage in his own portfolio, which at the end of June had around $800 million in assets under management. Morin says his fund has exposure to Madoff as well, largely the result of consolidation in union pension funds where locals like Syracuse had transferred money to his oversight.

Syracuse consolidated in June, but that doesn't mean that the Syracuse fund will now be covered by money in the larger pool. Morin says pension assets remain segregated at least for a period of time, meaning that Syracuse may have to shoulder the entire Madoff hit on its own, which one person close to the matter said was nearly all the money it had under management. Morin declined to comment on the Syracuse exposure.

The labor union exposure to the Madoff Ponzi scheme adds another twist in the scandal, which may be the largest in recent financial history.

Madoff recently turned himself in to authorities, conceding he created a Ponzi scheme that fleeced nearly $50 billion from investors.

One of the big problems facing many investors—union pensioners in particular—is the issue of "clawbacks." Under recent court precedent, the trustee in charge of unraveling the mess, and recouping as much money as possible, can force investors who took money from Madoff through redemptions or other payments to return that cash.

A recent case labeled the receipt of such money a "fraudulent conveyance" of funds, meaning the redeemer received money that was produced as part of a fraud since this money was derived from the Ponzi scheme not a legitimate investment.

Union pension funds are at particular risk from clawbacks because they receive regular payments when members retire.

Morin told CNBC he has hired attorneys to determine if individual members who have received retirement money from Madoff have to repay the funds. The trustee in the Madoff case, Lee Pickard, has indicated that he is likely to seek the return of money from redeemers.

"I'm still assessing the situation," Morin said, adding he isn't even sure how big his overall exposure is, though he said funds under his control were more diversified than the Syracuse fund with its large exposure to Madoff.

One other problem union executives like Morin have involves Securities Investor Protection Corporation insurance, which is supposed to insure up to $500,000 in losses. It is unclear for example, if SIPIC would cover all 16,000 of his members, because some members, like those in Syracuse invested in Madoff through a single investment adviser. In those instances, SIPIC might not dole out the money individually, but treat the adviser as a single investor.

For more stories from CNBC, go to cnbc.com.

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