Even innocent investors who get caught up in a Ponzi scheme can still be seen as having taken "other people's money" if they withdraw their funds before the scheme collapses.
"Clawback" lawsuits, which arise after a company or fund collapses, are attempts to seize illicit profits or withdrawals made by an investor.
A Ponzi scheme works by paying investors with money from new clients. When investors withdrew funds from "feeder funds" such as Fairfield Sentry, they were paid with other investors' money.
Fairfield Sentry's liquidators are trying to recover those early redemption payments to service claims against the fund arising from its liquidation in a "just, fair and equitable" manner.
Irving Picard's suits have focused on banks that gained fees through advising clients and creating investment products based on Bernard Madoff's fraudulent scheme, but have the same purpose: reducing the losses made by investors by reclaiming profits claimed by banks.
However, Mr Picard's ability to file new cases is limited by a two-year time limit following the initial filing of bankruptcy proceedings. On the other hand, because Fairfield Sentry filed for bankruptcy in the British Virgin Islands it is not bound by the same statute of limitations and could file further suits.
The fund's liquidators expect they will be granted at least the same amount of time to file as Mr Picard.
However, the Fairfield Sentry clawback case may ultimately hinge on whether it is ruled in other cases that the people directing investment to the Madoff fund were aware that his scheme was a fraud.
"It does strike me as very odd that they would have a legal basis to be putting money in, not in good faith, and to take it out, in good faith," said one lawyer, who asked not to be named.
