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Or, how the law allows innocent people to lose their house.

"Fraudulent conveyance" (also sometimes "fraudulent transfer") is a legal term for giving away money you don't really have. The legal concept of fraudulent conveyance is designed to prevent debtors from giving away assets to other people right before their debts come due, and is based on the idea that since the debtor was in debt to another party, those assets didn't actually belong to them and therefore do not belong to the recipient either, and can thus be legally claimed by the creditor.

Under US law, fraudulent conveyance is cause for a civil action, and is typically brought by creditors or bankruptcy trustees. Most US states have passed a version of the Uniform Fraudulent Transfer Act which enshrines the concept in state law, and it is also covered under the Federal Bankruptcy Code.

What makes fraudulent conveyance so interesting (and potentially controversial), is that it can be used to recover money and assets from innocent parties who had no knowledge of the fraud. These cases are somewhat rare - usually the debtor transfers assets to an "insider" who has direct knowledge of the fraud - but in some cases, it is theoretically possible that a friend might give you some money to help you buy a house or something, and then a few years later you could be slapped with a lawsuit and forced to pay back that money to creditors of your friend whom you had no previous interaction with.

A good example of this is the recent case of Bernard L. Madoff Investment Securities LLC. It turned out that respected Wall Street trader Bernard Madoff had actually been running an elaborate Ponzi scheme for decades, under the guise of a hedge fund. When the scheme was revealed in December, 2008, many investors who had pulled their money out years before likely breathed a sigh of relief, thinking they had escaped the estimated $50 billion in losses that have accrued to Madoff's current clients.

But under the legal concept of fraudulent conveyance, it is possible for the current clients or the bankruptcy trustees to sue previous clients to recover their high returns on their investments, or even part of their original principal, despite the fact that these earlier investors had no knowledge of the fraud. In fact, the bankruptcy trustees would actually be legally required to pursue such cases as part of their fiduciary duty.

Madoff's clients were mostly very wealthy individuals or corporations, so hopefully nobody loses their house over this, but the case underlines how investors need to be wary of investing when things seem too good to be true, because they probably are.

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