With the allure of exclusivity and promises of wealth, Ponzi
schemes and their perpetrators have victimized people of all
backgrounds. But what happens after the scheme is uncovered and a
receiver or trustee is appointed to wind down the entity and
marshal the assets for the benefit of the victims? The receiver or
trustee is likely to aggressively pursue litigation against a
potentially liable party to recover assets. While the viability of
potential claims are subject to the facts at issue and potential
defenses that may be asserted in a particular case, recently
receivers and trustees have aggressively pursued four types of
defendants beyond those directly involved in the scheme: service
providers with deep pockets who allegedly enabled the scheme to
continue; investors who profited from the scheme and allegedly knew
or should have known that it was a fraud; unknowing investors who
received "false profits"; and those who received
gifts.
Recently, receivers and trustees have brought cases against
third-party services providers, such as financial institutions,
alleging that but for the financial institution turning a blind eye
to "red flags" indicating a Ponzi scheme, the Ponzi
scheme would have been discovered and stopped sooner. In these
cases, the receiver or trustee seeks to recover the damages that
occurred after the Ponzi scheme would have been discovered and
stopped. Generally, the damages sought far exceed what the
institution received as compensation for the services it provided.
For example, in the Bernard Maddoff case, the trustee has posited
this theory in complaints filed against several large financial
institutions, including HSBC, JPMorgan Chase, and UBS seeking
approximately $17 billion in damages from those three businesses
combined.
Receivers and trustees have also targeted those investors who they
contend had specialized knowledge or substantial access to the
schemer and knew or should have known about the Ponzi scheme.
Typically, the receiver or trustee argues that these investors
disregarded the indicia of fraud because it was in their economic
interest to do so. Again, a recent example comes from the Madoff
case where the Trustee has sued Fred Wilpon and Saul Katz, owners
of the New York Mets baseball team.
Even investors who the receiver or trustee agrees had no idea that
they were caught up in a Ponzi scheme could find themselves as
defendants in a clawback suit if they received more than they
invested in the Ponzi scheme. Absent a viable defense, typically,
an innocent investor will be permitted to retain up to the amount
of principal they invested, but forced to return the
"profits."
Finally, a recipient of a gift from the Ponzi scheme will typically
be required to return it to the estate. Frequently, defendants in
such cases are friends or family of the perpetrator who received
lavish gifts, such as cars or jewelry. However, this principle has
also led to harsh results for charities that already spent the
money donated by the Ponzi scheme.
These cases show that the impact of a Ponzi scheme can last long
after the fraud has been stopped. Those who profited in any way
will likely find themselves as targets of a receiver or trustee.
Because the viability such claims depends on the facts of a
particular case, if you find yourself in that unfortunate
situation, you should seriously consider obtaining experienced
counsel to advise you on your options.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.