A couple of fascinating articles on the Madoff fund implosion point out some really bad news for investors: if you were invested in the Madoff fund, but you smelled something fishy about it and sold your shares before the big fraud was revealed, you may be compelled to give back your profits. So even those who got out safely, didn't get out safely.
Why? Because bankruptcy law permits the bankruptcy trustee to "avoid" (i.e. get back) transfers of money that was transferred by the bankrupt party at a time when the party was insolvent if the bankrupt party did not receive reasonably equivalent value in exchange and the transfer was made to hinder, delay, or defraud any creditor. In a similar, recent case involving the Bayou Fund, a court held that every redemption (i.e. sale of shares) met these criteria: the fund's share price was, like the Madoff Fund's, imaginary -- the fund managers were just making it up to preserve the appearance of good returns. So when shareholders redeemed their money, the fund was transferring out more money than the value of the shares it was getting back. And the fund was insolvent. And the fund did this to preserve its big fraud. So the criteria for avoiding the transfer were met. The court held that an investor could defend against the claim for return of the money by showing that the redemption was made in "good faith" -- that the investor had no inkling anything was wrong with the fund -- but this was a defense, it would be up to the investor to show it, and it wouldn't apply if the investor saw some red flags before getting out.
One of the articles linked above states that there is no time limit on these avoidable transfers. That seems, based on my quick research, to be mistaken: the bankruptcy law section linked above sets a time limit of 2 years. But I'm not a bankruptcy expert and there could be some other section that looks back even further.
But certainly resolving the Madoff fund's problems is going to be a big, big mess for investors, even those who thought they'd gotten out.