Securities and Exchange Commission v. Management Solutions et al
Filing
1215
MEMORANDUM DECISION and Orderdenying 685 Motion for Findings Regarding the Existence and Start Date of a Ponzi Scheme and for Approval to Pool Claims and Assets filed by Receiver John A. Beckstead. See Order for details. Signed by Judge Bruce S. Jenkins on 8/22/13. (jmr)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF UTAH, CENTRAL DIVISION
______________________________________________________________________________
SECURITIES AND EXCHANGE
COMMISSION,
Plaintiff,
vs.
MANAGEMENT SOLUTIONS, INC., et
al.,
Defendants.
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Civil No. 2:11-CV-1165-BSJ
MEMORANDUM OPINION AND
ORDER
FILED
CLERK, U.S. DISTRICT COURT
August 22, 2013 (9:46am)
DISTRICT OF UTAH
______________________________________________________________________________
INTRODUCTION
On November 13, 2012, the Receiver filed a Motion for Findings regarding the Existence
and Start Date of an alleged Ponzi Scheme and for Approval to Pool Claims and Assets for
administrative purposes of the receivership.1 Namely, he asked the court to find a Ponzi scheme
involving Management Solutions, Inc. (“MSI”) existed beginning April 1, 1996, in order to
calculate investor claims and pursue receivership claims in ancillary cases.2 Further, the Receiver
sought court approval to pool investor claims and assets for pro-rata distribution. After several
pre-hearing conferences, a Joint Pre-Hearing Order was signed on May 24, 2013.3 The order
1
(Motion for Findings Regarding the Existence and Start Date of a Ponzi Scheme and for
Approval to Pool Claims and Assets, filed November 13, 2012 (CM/ECF No. 685).)
2
(Memorandum in Support of Motion for Findings Regarding the Existence and Start
Date of a Ponzi Scheme and for Approval to Pool Claims and Assets, filed November 13, 2012
(CM/ECF No. 686).)
3
(Joint Pre-Hearing Order Regarding Receiver’s Motion for Findings Regarding the
Existence and Start Date of a Ponzi Scheme, filed May 24, 2013 (CM/ECF No. 1103).)
denied the Jacobsons’ standing to contest the issue as a party and bifurcated the issue of the
existence and beginning of the Ponzi scheme and the pooling of assets.4 The Receiver’s motion
came on for evidentiary hearing June 17, 2013, with the following appearances: Daniel J. Wadley
appeared on behalf of Plaintiff, the Securities and Exchange Commission (“SEC”); Doyle S.
Byers and Brent E. Johnson appeared on behalf of the Receiver, John A. Beckstead; Joseph
Covey, Robert S. Clark and Royce B. Covington appeared on behalf of Intervenor Objectors, the
McDermott family; and Matthew C. Barneck appeared on behalf of Intervenor Objectors,
Matthew A. Nielson and Jill R. Nielson. Testimony and evidence was received, final argument
was heard on June 20, 2013, and the matter was taken under advisement.
Having reviewed the testimony and exhibits received and considered the arguments of
counsel, this court now denies the Receiver’s limited motion and has chosen to elaborate upon
the reasons for doing so.
PROCEDURAL HISTORY
The Complaint in the above-entitled matter of the SEC was filed on December 15, 2011.5
Among other things, the SEC alleged that the Jacobsons and MSI employed schemes or artifices
“typical of a Ponzi scheme” in violation of Section 17(a)(1) of the Securities Act, 15 U.S.C. §
77q(a)(1); committed fraud in the offer and sale of securities in violation of Sections 17(a)(2) and
(3) of the Securities Act, 15 U.S.C. § 77q(a)(2) and (3); committed fraud in connection with the
purchase and sale of securities in violation of Section 10(b) and Rule 10b-5 of the Securities
4
(Id. at 2-3.)
5
(Complaint, filed by Securities and Exchange Commission on December 15, 2011
(CM/ECF No. 1).)
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Exchange Act, 15 U.S.C. § 78j(b) and 17 C.F.R. § 240.10b-5; offered and sold unregistered
securities in violation of Sections 5(a) and (c) of the Securities Act, 15 U.S.C. § 77e(a) and (c);
and offered and sold securities by an unregistered broker or dealer in violation of Section 15(a) of
the Exchange Act, 15 U.S.C. § 78o(a).
Early on, at the instance of the SEC—which was seeking a temporary restraining
order—the court made the following findings:
2.
The commission has made a sufficient and proper showing in support of
the relief granted herein as required by Section 20(b) of the Securities Act of 1933
. . . and Section 21(d) of the Securities Exchange Act of 1934 . . . by evidence
establishing a prima facie case of and a strong likelihood that the Commission
will prevail at trial on the merits and that the Defendants, directly or indirectly,
have engaged in and, unless restrained and enjoined by order of this Court, will
continue to engage in acts, practices and courses of business constituting
violations of Sections 5(a), 5(c), and 17(a) [of the Securities Act of 1933] . . . and
Sections 10(b) and 15(a) of the Exchange Act . . . and Rule 10b-5 thereunder.6
The temporary restraining order was issued December 15, 2011.
On November 8, 2012, Wendell A. Jacobson consented to the relief sought by the SEC:
2.
Without admitting or denying the allegations of the complaint (except as
to personal and subject matter jurisdiction, which Defendant admits),
Defendant hereby consents to the entry of a Final Judgment in the form
attached hereto (the “Final Judgment”) and incorporated by reference
herein, which, among other things:
(a)
Permanently restrains and enjoins Defendant from violation of
Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933
(“Securities Act”), Sections 10(b) and 15(a) of the Securities
Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5
thereunder.
(b)
Orders Defendant to pay disgorgement of $11,193,005 plus
6
(Temporary Restraining Order, Order Accelerating Discovery and Order to Show Cause,
filed December 15, 2011 (CM/ECF No. 3).) Interestingly, the SEC did not refer to claims of a
Ponzi scheme in their motion for a TRO.
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prejudgment interest thereon in the amount of $2,147,057.52 for a
total of $13,340,062.52. Disgorgement shall be deemed satisfied by
the Defendant turning over to the Court-appointed Receiver and
relinquishing any interest, ownership, or claim to any and all assets
and/or interests in any assets he holds and/or has held in the past,
through December 15, 2011, together with any interest he holds
and/or has held in any entity, directly or indirectly, through
December 15, 2011, necessary to satisfy all Court-approved claims
against the Defendants herein and any Receivership entity.
(c)
Orders Defendant to pay a civil penalty in the amount of $150,000
under Section 20(d) of the Securities Act and Section 21(d)(3) of
the Exchange Act.
4.
Defendant waives the entry of findings of fact and conclusions of law
pursuant to Rule 52 of the Federal Rules of Civil Procedure.
5.
Defendant waives the right, if any, to a jury trial and to appeal from the
entry of the Final Judgment.7
The court thereafter entered a Judgment of Permanent Injunction and Other Relief Against
Defendant Wendell A. Jacobson on December 18, 2012.8
The Consent of Defendant Allen R. Jacobson was filed on November 8, 2012.9 Allen R.
Jacobson also consented to the entry of relief sought by the SEC:
2.
Without admitting or denying the allegations of the complaint (except as
to personal and subject matter jurisdiction, which Defendant admits),
Defendant hereby consents to the entry of a Final Judgment in the form
attached hereto (the “Final Judgment”) and incorporated by reference
herein, which, among other things:
7
(Consent to Entry of Judgement of Wendell A. Jacobson filed by Securities and
Exchange Commission, filed November 8, 2012 (CM/ECF No. 655) at 1-2, 3.)
8
(Judgment of Permanent Injunction and Other Relief against Defendant Wendell A.
Jacobson, filed December 18, 2012 (CM/ECF No. 784).)
9
(Consent to Entry of Judgment of Allen R. Jacobson filed by Securities and Exchange
Commission, filed November 8, 2012 (CM/ECF No. 656).)
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(a)
Permanently restrains and enjoins Defendant from violation of
Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933
(“Securities Act”), Sections 10(b) and 15(a) of the Securities
Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5
thereunder.
(b)
Orders Defendant to pay disgorgement of $4,462,073 plus
prejudgment interest thereon in the amount of $855,920.94 for a
total of $5,317,993.94. Disgorgement shall be deemed satisfied by
the Defendant turning over to the Court-appointed Receiver and
relinquishing any interest, ownership, or claim to any and all assets
and/or interests in any assets he holds and/or has held in the past,
through December 15, 2011, together with any interest he holds
and/or has held in any entity, directly or indirectly, through
December 15, 2011. Defendant’s disgorgement obligation shall
exclude Defendant’s interest in his residential property and the
furnishings therein located at 431 West 1430 South, Payson, Utah;
Defendant’s personal vehicles, including a 2008 BMW 528xi, VIN
ending in 2705, and a 2005 Nissan Armada, VIN ending in 0918;
and approximately $3,000 in cash, held in the savings accounts of
his three minor children, account numbers ending in 4871, 9114,
4986, and 3228.
(c)
Orders Defendant to pay a civil penalty in the amount of $150,000
under Section 20(d) of the Securities Act and Section 21(d)(3) of
the Exchange Act.
4.
Defendant waives the entry of findings of fact and conclusions of law
pursuant to Rule 52 of the Federal Rules of Civil Procedure.
5.
Defendant waives the right, if any, to a jury trial and to appeal from the
entry of the Final Judgment.10
The court thereafter entered a Judgment of Permanent Injunction and Other Relief Against
Defendant Allen R. Jacobson, filed on December 18, 2012.11
10
(Id. at 1-2, 3.)
11
(Judgment of Permanent Injunction and Other Relief against Defendant Wendell A.
Jacobson, filed December 18, 2012 (CM/ECF No. 783).)
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On November 13, 2012, attorneys for the Receiver filed the instant motion and
accompanying memoranda.12
STATEMENT OF THE FACTS
Uncontested Facts
In the Stipulated Pre-Hearing Order, the parties agreed to the following facts:
1.
The Securities and Exchange Commission (“SEC”) filed a complaint
against Defendants Management Solutions, Inc., Wendell Jacobson and
Allen Jacobson in this case on December 15, 2011, alleging, among other
things, violations of federal securities laws and the operation of a Ponzi
scheme. The SEC alleges that Defendants “have operated the investment
program as a wide-scale Ponzi scheme since at least January 1, 2008.”
(Emphasis added.) The SEC makes claims, among others, that
Defendants’ operation of a Ponzi scheme violated Section 17(a)(1) of the
Securities Act [15 U.S.C. § 77(q)(a)(1)] (Employment of a Device,
Scheme or Artifice to Defraud); Section 17(a)(2) and (3) of the Securities
Act [15 U.S.C. § 77q(a)(2)] (Fraud in the Offer and Sale of Securities);
and Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b5 thereunder [17 C.F.R. § 240.10b-5] (Fraud in Connection With the
Purchase and Sale of Securities).
2.
Final Judgments were entered against Defendants pursuant to the
agreement of Defendants Management Solutions, Inc., Wendell Jacobson
and Allen R. Jacobson.
3.
From 1996 to 2011, there were extensive inter-company transfers and
combining of money between and among Jacobson-owned or controlled
entities.
4.
The Jacobsons, through their various entities, engaged in substantial real
estate-related business operations from 1996 to 2011, which operations
generated tens of millions of dollars of revenue.
12
(Motion for Findings Regarding the Existence and Start Date of a Ponzi Scheme and
for Approval to Pool Claims and Assets, filed November 13, 2012 (CM/ECF No. 685);
Memorandum in Support of Motion for Findings Regarding the Existence and Start Date of a
Ponzi Scheme and for Approval to Pool Claims and Assets, filed November 13, 2012 (CM/ECF
No. 686).)
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5.
When the Receiver was appointed, the receivership estate included a large
number of real estate-related properties and projects with more than 8,000
residential and commercial rental units, valued in the hundreds of millions
of dollars.
6.
From 1996 to 2011, the Jacobsons routinely offered a return of 5%-8% per
annum on loans and/or investments to Investors.
7.
Investors who invested with the Jacobsons or their entities in the mid to
late 1990s were promised similar returns to Investors who invested with
Jacobsons or their entities in 2010 and 2011.13
Findings of Fact
Wendell Jacobson was a real estate investor and real estate manager.14 In 1991, he created
MSI as a vehicle for his activities.15
The Jacobsons raised funds through a variety of avenues. Some “investors” were given
property interests in the various MSI properties in return for money.16 Others furnished loans
with various interest rates and payment schedules.17 “Investors,” in various forms, were promised
returns characterized as “interest” or as a “return of capital” with the appropriate K-1 or 1099
forms filed and furnished for tax purposes.18 Some investors claimed shared depreciation on
13
(Joint Pre-Hearing Order Regarding Receiver’s Motion for Findings Regarding the
Existence and Start Date of a Ponzi Scheme, filed May 24, 2013 (CM/ECF No. 1103) at 9-11.)
14
(See Transcript of Evidentiary Hearing, dated June 17-20, 2013 (“Tr.”) at 24.)
15
(Tr. at 167.)
16
(Tr. at 93-94. A number of exhibits were received in evidence during the hearing.
Movant’s exhibits are hereinafter cited as “MX-[number]”; MX-43.)
17
(See Tr. at 274.)
18
(MX-131; Tr. at 172-73.)
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operating properties to shelter income as well.19 The guaranteed promised “return” on an
investment was five to eight percent,20 whether the interest was on money “loaned” or was a
“return of capital.”21 The anticipated gain on sale of property was a taxable capital gain.22
The Jacobsons created numerous business entities—over 208 in this matter—to manage
properties and investor contributions.23 According to information generally furnished to
investors, each entity, for operating and tax purposes, purportedly was a stand-alone and
independent entity.24 According to representations and literature furnished by the Jacobsons, such
independent entities were to rely on self-generated operational income to produce a five to eight
percent promised return, as well as anticipated gain from sales of appreciated properties.25 Each
“independent” entity maintained one or more bank accounts,26 with the Jacobsons as signators,27
on-site management contracted and delegated to the Jacobsons, management power exercised by
the Jacobsons, and power of sale vested in the Jacobsons.28
19
(Tr. at 456.)
20
Five to eight percent is a good, if not high, return compared to today’s typical savings
account return of less than one percent.
21
(Tr. at 27; MX-131; see also Tr. at 275, 291.)
22
(Tr. at 455.)
23
(Tr. at 134.)
24
(See Tr. at 146-47.)
25
(See Tr. at 171, 173-74.)
26
(Tr. at 135.)
27
(Tr. at 219.)
28
(Tr. at 177, 179; MX-130.0004.)
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The Jacobsons were very proud in telling investors that default had never occurred in the
promised monthly return—whether called “return of capital” or “interest”, and that early
investors had profited from the sale of refurbished properties.29 Some early investors did indeed
achieve a gain in cash or noted on the Jacobson-kept books on the sale of property.30 The
Jacobsons worked hard to pay investors either directly, if requested, or by crediting their
account.31
A problem would arise when a particular property was not self-sustaining, monthly
promised “returns” had to be “paid”, and account crediting alone was not good enough to satisfy
investors. Such payment of promised returns often came, not from an entity’s own operations,
but from new investors in a newly-created “stand-alone” investment entity, from borrowing on
the assets of one entity to meet the obligations of another, or from selling a property owned by
one Jacobson-controlled entity to another Jacobson-controlled entity to produce on paper a
“profit” to the investors in the earlier entity.32 Peter often paid Paul’s obligations.33
Each MSI investment property was expected to sell in three to five years, but in the
interim, investors were to be paid or credited their monthly return, whether it sold or not during
29
(Tr. at 175-76; see also Tr. at 367.)
30
(See Tr. at 244.)
31
(See Tr. at 175; MX-143.)
32
(Tr. at 68, 226, 233-34, 244; see also Tr. at 233 (describing how everything was
commingled, then split and commingled again in multiple accounts); Tr. at 459.)
33
See United States v. Cook, 573 F.2d 281, 282 n.3 (5th Cir. 1978)
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that time frame.34
While not always followed by the Jacobsons, there seems to have been a general pattern
for raising money from MSI investors.35 An “underperforming” apartment complex or other
property would be located.36 An investor LLC would be organized.37 A property-owning LLC
would be organized.38 An investor would acquire a defined percentage in the investor LLC.39
The Jacobsons (or a Jacobson entity) would acquire a percentage interest in the investor
LLC–often fifty percent, sometimes more or less—with the representation that, like the other
investors, such was a cash investment by the Jacobsons (or a Jacobson entity).40 The investor
LLC would then contribute capital to the property-owning LLC and own one-hundred percent of
the property-owning LLC.41
The Jacobsons, when raising money, would promise investors a return of five to eight
percent per annum, paid or credited monthly in the form of a “return of capital” or “interest” on
money “invested,” with year-end tax reporting forms, K-1 or 1099, and the tax benefits for
34
(See Tr. at 239.)
35
(MX-131.)
36
(See MX-76; MX-93; MX-131.)
37
(See MX-130.0003.)
38
(See Tr. at 361.)
39
(See Tr. at 67.)
40
(Tr. at 28; MX-130.0003.)
41
(Tr. at 26; see also MX-130.0003.)
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depreciation—and if the property sold for a profit, capital gain at the fifteen percent tax rate.42 In
literature, the Jacobsons would represent that some properties when sold, coupled with the
monthly payments, had produced gains from twelve to eighteen percent and more.43
There was usually a management contract with a Jacobson or Jacobson entity for which
they were paid a fee (usually, not always, six percent) from the investor LLC or the propertyowning LLC, or both.44 The property acquired by the property-owning LLC was purportedly a
stand-alone property with a separate bank account, and proceeds from the operation ran through
that account.45 Such was to generate the monthly “return” promised by the Jacobsons.46
The various separate entity bank accounts were all controlled by the Jacobsons.47 The
books and records of all of the entities were kept by the Jacobsons, or under their supervision and
control.48 “Underperforming properties” acquired often were in need of improvements and capital
for such was often “built” into the capital contributions of the “investors”, including the
Jacobsons.49 When they were not, working capital or acquisition capital needed to be acquired
42
(Tr. at 172-73, 461.)
43
(See Tr. at 515; MX-135.)
44
(See Tr. at 312-13, 341-42, 454, 503.)
45
(See MX-130.0007.)
46
(See Tr. at 180-81, 186-87.)
47
(MX-130.0004.)
48
(Tr. at 26, 116, 219.)
49
(See Tr. at 447-49.)
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elsewhere.50
The Jacobsons owned a Texas corporation called Thunder Bay Mortgage, Inc. (“Thunder
Bay”), which maintained multiple bank accounts in various banks.51 Wendell Jacobson was the
signator on those accounts.52
As a matter of practice—not always, but generally—the money invested in an investment
LLC would not flow directly from the investment entity to a particular property LLC, but would
first travel into Thunder Bay accounts where it would be commingled with monies from
similarly-situated investment LLCs organized by the Jacobsons.53 Purchase money as thus
commingled would then flow back to the appropriate property LLC for use in completing a
purchase or meeting various obligations, management fees, maintenance, or other obligations,
such as the promised monthly “return” when repayment of contributions was requested.54
Promised monthly payments, if not otherwise credited to an investor account, would be
transferred from Thunder Bay to a local account and paid out locally to the promised investor
recipients.55 If there was insufficient money from local operations, the investor account was
augmented by funds from Thunder Bay so that promised payment or credits could be made.56
50
(Tr. at 447-48.)
51
(MX-125.)
52
(See id.)
53
(Tr. at 29-31; MX-002.0010; MX-130.0004)
54
(See Tr. at 180-81, 219; see also MX-002.0024.)
55
(See Tr. at 219.)
56
(See id.; Tr. at 377.)
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Those additional funds in Thunder Bay often came from other investors in different investor
LLCs which had been organized by the Jacobsons with similar properties and similar promises.57
When the Jacobsons had promised to make a capital contribution to a particular
investment entity, Thunder Bay would often transfer funds to the entity’s account, immediately
withdraw that payment the next day, and substitute on the books a bookkeeping entry showing
that Thunder Bay had “borrowed” the sum and owed it to the entity, and on the Thunder Bay
books show it as a “note payable”.58 Yet, there were no physical notes payable, no payment date
or dates on such notes or in the books, no interest rates—nothing but bookkeeping entries.59 The
2010 tax return showed Thunder Bay owed “notes payable” in excess of $103 million, mostly to
MSI investment entities from which it had obtained money, newly organized LLC’s into which
new investors had contributed or old investors had rolled over old “gains” or investments into
new entities as new money.60
There was a Jacobson practice which from time to time produced happy results for early
investors and did so over a long period of time. For example, a property would be acquired by a
particular group of MSI investors for a given price.61 It was “improved.”62 It then needed to be
sold to meet the expected limit of three-to-five year retention. A new MSI investment entity
57
(Tr. at 259; see also MX-002.0017.)
58
(Tr. at 29, 379; MX-130.0009; see also Tr. at 290; MX-130.0005.)
59
(Tr. at 30, 185, 536; see also MX-130.00009-130.0010.)
60
(See Tr. at 422, 428-29.)
61
(See MX-130.0007.)
62
(See MX-143; MX-130.0007.)
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would be organized and funds raised from old and new investors.63 The new investment entity
would buy the property to pay off the interests of the old investment entity with a “gain” to the
old investors and a higher base for the new investors.64 Wendell Jacobson, in control of the new
MSI entity, would make an offer to purchase the property, and Wendell Jacobson, in control of
the older MSI entity, would accept the offer as seller.65 Often, the original investors, thus made
happy, would ask that their interest in the sales price be rolled over into yet another new
investment entity.66 Bookkeeping entries would follow, but neither MSI entity’s investors were
informed that they were dealing with another MSI entity.67
On occasion, the Jacobsons would find a property and have an associate arrange to
purchase the property as a straw buyer, with funds furnished by Wendell Jacobson (often through
Thunder Bay) and after the original purchase, the straw buyer would sell the same property at a
higher price to an entity organized by Wendell Jacobson with new investors, and often some of
the sales price would go to Wendell Jacobson or a Jacobson entity as a “finders fee”.68
Other than for bookkeeping purposes, the Jacobsons treated the multitude of MSI
investment entities as a family, or in short, as one enterprise.69 Generally, monies from multiple
63
(See id.)
64
(See Tr. at 244; See MX-130.0008.)
65
(See Tr. at 506.)
66
(See Tr. at 527.)
67
(Tr. at 187.)
68
(See Tr. at 35, 226, 327, 522, 537-38; MX-130.0011-130.0012.)
69
(Tr. at 219.)
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operations, banking, sales, and rents were swept into Thunder Bay accounts and divided up from
there to meet the multiple demands of multiple MSI entities.70 Most funds from multiple sources
were commingled in Thunder Bay and consequently most lost their individual identity as to
source.71
It became a balancing act by Wendell Jacobson in which he became quite adept. Of
course, many investors were not aware that such commingling of funds was taking place.72
Often, they concentrated on their own investment entity or a particular piece of property.73
The Jacobsons’ balancing shuffle could not last indefinitely. By fall 2010, Thunder Bay
became increasingly insolvent, and a confidential tip was given to the SEC, which triggered an
investigation that led to the current case and receivership.74
ANALYSIS
The issues raised before the court in this hearing are (1) whether the Jacobsons’
investment scheme, MSI, can be classified, from the beginning, as a “Ponzi scheme”, and, if so,
(2) the start date of the Ponzi scheme.
The Receiver’s purpose in pursuing the court’s finding of the existence of a Ponzi
scheme, beginning April 1, 1996, is to allow the Receiver to use that finding to invoke the “Ponzi
70
(See MX-130.0005.)
71
(Tr. at 232.)
72
(See Tr. at 185-85.)
73
(See MX-143.)
74
(Tr. at 21, 75, 110, 130.)
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presumption” in the forty MSI ancillary cases.75 Under the Uniform Fraudulent Transfers Act
(“UFTA”), “a defrauded creditor [or, in this case, the Receiver] may recover amounts transferred
from a debtor if the creditor [Receiver] can prove that the debtor made a fraudulent transfer of
assets and the transferee is not entitled to claim a statutory defense from liability.” Warfield v.
Carnie, 2007 WL 1112591 at *9 (N.D. Tex.). To establish this claim, the Receiver must prove
“the debtor’s actual intent to hinder, delay, or defraud.” See Wing v. Dockstader, 2010 WL
5020959 at *4 (D. Utah). Under the “Ponzi presumption,” “The mere existence of a Ponzi
scheme is sufficient to establish actual intent to defraud.” Donell v. Kowell, 533 F.3d 762, 770
(9th Cir.2008) (quoting In re AFI Holding, Inc., 525 F.3d 700, 703 (9th Cir.2008)); see also In re
Indep. Clearing House, 77 B.R. 843, 860 (D. Utah 1987) (“One can infer an intent to defraud
future undertakers from the mere fact that a debtor was running a Ponzi scheme. Indeed, no other
reasonable inference is possible.”). If the “Ponzi presumption” is used, the Receiver’s burden of
proving intent to defraud shifts, and the transferee then has the burden of “establishing a statutory
defense from liability.” Warfield v. Carnie, 2007 WL 1112591 at *9. In order to establish the
“Ponzi presumption”, the Receiver must prove that a Ponzi scheme existed.
Generally speaking, there is no absolute list of required elements for a Ponzi scheme. See
Bear, Stearns Securities Corp. v. Gredd, 397 B.R. 1, 12 (Bankr. S.D.N.Y. 2007). Rather, as the
bankruptcy court explained, “courts look for a general pattern, rather than specific requirements.”
The general pattern courts look for when labeling a scheme as “Ponzi” is “any sort of inherently
fraudulent arrangement under which the debtor-transferor must utilize after-acquired investment
75
(See Tr. at 558.)
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funds to pay off previous investors in order to forestall disclosure of the fraud.” In re Bayou
Group, LLC, 362 B.R. 624, 633 (Bankr. S.D.N.Y. 2007).
Similarly, the SEC defines a Ponzi scheme as
an investment fraud that involves the payment of purported returns to existing
investors from funds contributed by new investors. Ponzi scheme organizers often
solicit new investors by promising to invest funds in opportunities claimed to
generate high returns with little or no risk. In many Ponzi schemes, the fraudsters
focus on attracting new money to make promised payments to earlier-stage
investors and to use for personal expenses, instead of engaging in any legitimate
investment activity.
U.S. Securities and Exchange Commission, Ponzi Schemes—Frequently Asked Questions at
http://www.sec.gov/answers/ponzi.htm (last visited June 18, 2013). The SEC also provides a list
of “red flags” typically present in a Ponzi scheme:
•
•
•
•
•
•
•
High investment returns with little or no risk,
Overly consistent returns,
Unregistered investments,
Unlicensed sellers,
Secretive and/or complex strategies,
Issues with paperwork, and
Difficulty receiving payments.
See id.
All descriptions of Ponzi schemes are patterned after, or at least reference, the infamous
case of Charles Ponzi.
The Original Ponzi Scheme
In 1919, Charles Ponzi began “the business of borrowing money on his promissory
notes.” Cunningham v. Brown, 265 U.S. 1, 7 (1924). He told his would-be victims that he was
purchasing international postal coupons and selling them for twice the price because of the
turbulent foreign exchange rate following World War I. In exchange for their investment, Ponzi
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promised a fifty-percent return of interest within ninety days. In fact, he paid many of these notes
in full within forty-five days, and he promised a full return of unmatured notes presented in less
than the forty-five days. Within eight months, Ponzi lured in thousands of investors, received
over $9 million, and promised to pay over $14 million. However, Ponzi never purchased any
stamps or used the investors’ money for any other business venture; rather, he paid returns to
early investors with money received from new investors. In the following July, the public
authority began an investigation, which triggered a “bank run” on Ponzi’s investment scheme and
withdrawals by some investors of some of the money.
Once Ponzi was declared insolvent, the bankruptcy receiver attempted to recoup funds
taken by those few investors who were successful in recouping their money. Recognizing the
unfortunate position that all investors faced because of the scheme, the Supreme Court stated:
After August 2nd, the victims of Ponzi were not to be divided into two classes,
those who rescinded for fraud and those who were relying on his contract to pay
them. They were all of one class, actuated by the same purpose to save themselves
from the effect of Ponzi’s insolvency. Whether they sought to rescind, or sought
to get their money as by the terms of the contract, they were, in their inability to
identify their payments, creditors and nothing more. It is a case the circumstances
of which call strongly for the principle that equality is equity, and this is the spirit
of the bankrupt law. Those who were successful in the race of diligence violated
not only its spirit but its letter and secured an unlawful preference.
Id at 13. As such, the Court reversed and required the bankruptcy court to treat the investors’
withdrawals as unlawful preferences. See id.
First Circuit
Shortly after the original Ponzi case, the First Circuit was presented with a similar
investment scheme in Boyle v. Gray, 28 F.2d 7 (1st Cir. 1928). In 1922, Frank Gordon entered
into the fox breeding business. To finance his fox ranch, he created contracts in which he would
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sell to the contracting party a pair of foxes and up to two offspring, but he would continue to
ranch the foxes. Gray guaranteed that the foxes would produce at least two offspring (so that
there would be at least the same number of foxes for the next mating season). If there were fewer
offspring produced, Gray would supply extra foxes for the deficit. If there were more, Gordon
would keep the extra foxes. Initially, Gray sold these contracts for $2000.00 per pair of foxes and
guaranteed that the foxes “would produce 100 per cent. of the offspring for the first breeding
season following the date of the contract.” Id. at 8. After the first breeding season, Gordon had
the option of buying the offspring for $1500.00 and to continue the contract until the next
breeding season.
In reality, Gray considered the contracts to purchase a pair of foxes an investment in his
entire fox industry. Id. at 17. Further, the fox pairs were not as productive as he anticipated: the
foxes quarreled, refused to mate, and died of disease epidemics. Thus, his production rate was
only around fifty percent, despite the fact he had promised many investors one-hundred percent
production. However, when Gray exercised the option to buy the offspring for $1500.00, contract
holders raved about the investment scheme, and demand for contracts soared. Meanwhile, Gray
would buy new pairs of foxes for $700.00 to supply the market for new investors. In his dissent,
Judge Anderson described the scheme as follows: “The earlier buyers of ‘an undivided interest in
[Gordon's] fox industry’ got a 75 per cent. return on their investment, and consequently became
enthusiastic advertisers of it; it was essentially Ponzi’s scheme of paying the earlier comers huge
profits from moneys furnished by the later comers.” Id, at 17, citing Cunningham, 265 U.S. 1.
Like Ponzi, Gray would pay the $1500.00 guarantee—or the interest on the investment—by
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using the $2000.00 paid by later inventors who bought in because of the earlier buyers’
enthusiasm. See id. Thus, Anderson characterized the Gray’s scheme as a Ponzi scheme. See id.
Second Circuit
After seeing numerous Ponzi scheme cases, courts in the Second Circuit have adopted the
following description for a Ponzi scheme: “any sort of inherently fraudulent arrangement under
which the debtor-transferor must utilize after-acquired investment funds to pay off previous
investors in order to forestall disclosure of the fraud.” In re Bayou Group, LLC, 362 B.R. 624
(Bankr. S.D.N.Y. 2007). They have also proffered this description: “[i]n [a Ponzi scheme],
money from new investors is used to pay artificially high returns to earlier investors in order to
create an appearance of profitability and attract new investors so as to perpetuate the scheme.”
Bear, Stearns Securities Corp. v. Gredd, 397 B.R. 1, 8 (Bankr. S.D.N.Y. 2007) (citing In re
Manhattan Fund Ltd., 359 B.R. 510, 517 (S.D.N.Y 2007)) (citing Hirsch v. Arthur Andersen &
Co., 72 F.3d 1085, 1088 n.3 (2d Cir. 1995)).
The most famous Ponzi scheme to arise in the Second Circuit is the case of Bernie
Madoff. In 1960, Madoff formed Bernard L. Madoff Investment Securities LLC (“BLMIS”), a
broker-dealer registered with the SEC. See In re Bernard L. Madoff Investment Securities LLC,
424 B.R. 122, 127 (Bankr. S.D.N.Y. 2010). In 2006, BLMIS was registered with the SEC as an
investment advisor. “Outwardly, BLMIS functioned both as an investment advisor to its
customers and a custodian of their securities.” Madoff alleged the consistent and large success of
these investments were based off of his “split-strike conversion strategy.” In re Bernard L
Madoff Investment Securities LLC, 654 F.3d 229, 231 (2nd Cir. 2011). The Second Circuit
explained that “[t]he split-strike conversion strategy supposedly involved buying a basket of
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stocks listed on the Standard & Poor’s 100 Index and hedging through the use of options.” Id.
Because of the apparent success of his investments, “Madoff solicited billions of dollars of
investors” and made “[e]ntry into [his investment advisory business] coveted and selective, akin
to membership in an elite club. [The] aura of exclusivity, combined with the secrecy and reported
success of Madoff’s investment strategies, [also] limited the transparency of the . . . [b]usiness to
prospective investors.” In re Bernard L. Madoff Investment Securities LLC, 424 B.R. at 128.
However, Madoff never invested customer funds. In fact, his business consisted of no
trading whatsoever. See id. Rather than invest the funds,
Madoff used customer funds to support operations and fulfill other investors’
requests for distributions of profits to perpetuate his Ponzi scheme. Thus, any
payment of “profit” to a BLMIS customer came from another BLMIS customer's
initial investment. Even if a BLMIS customer could afford the initial fake
purchase of securities reported on his customer statement, without additional
customer deposits, any later “purchases” could be afforded only by virtue of
recorded fictional profits. Given that in Madoff’s fictional world no trades were
actually executed, customer funds were never exposed to the uncertainties of price
fluctuation, and account statements bore no relation to the United States securities
market at any time. As such, the only verifiable transactions were the customers’
cash deposits into, and cash withdrawals out of, their particular accounts.
Ultimately, customer requests for payments exceeded the inflow of new
investments, resulting in the Ponzi scheme's inevitable collapse.
Id at 128. After Madoff pled guilty to various federal charges, various courts in the Second
Circuit described Madoff’s scheme as a classic Ponzi Scheme. The Second Circuit noted, “As is
true of all Ponzi schemes, Madoff used the investments of new and existing customers to fund
withdrawals of principal and supposed profit made by other customers.” In re Bernard L Madoff
Investment Securities LLC, 654 F.3d at 232 (citations omitted).
Madoff’s scheme collapsed when the flow of new investments could no longer
support the payments required on earlier invested funds. See Eberhard v. Marcu,
530 F.3d 122, 132 n.7 (2d Cir. 2008) (describing typical Ponzi scheme “where
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earlier investors are paid from the investments of more recent investors . . . until
the scheme ceases to attract new investors and the pyramid collapses”).
Id. The bankruptcy court further noted that
BLMIS was insolvent at the time of the Constructive Fraudulent Transfers given
that Ponzi schemes are, by definition, at all times insolvent. . . . see also
Cunningham v. Brown, 265 U.S. 1, 8, 44 S. Ct. 424, 68 L. Ed. 873 (1924) (noting
Charles Ponzi, the namesake of the Ponzi scheme, “was always insolvent, and
became daily more so, the more his business succeeded. He made no investments
of any kind, so that all the money he had at any time was solely the result of loans
by his dupes.”).
In re Bernard L. Madoff Investment Securities LLC, 458 B.R. 87, n.15 (Bankr. S.D.N.Y. 2011).
Third Circuit
Courts in the Third Circuit describe Ponzi schemes in the same manner as the Second
Circuit, namely, “any sort of inherently fraudulent arrangement under which the debtor-transferor
must utilize after-acquired investment funds to pay off previous investors in order to forestall
disclosure of the fraud.” In re Le-Nature’s, Inc., 2009 U.S. Dist. LEXIS 85073 at *74 (W.D.
Penn.) (citing In re Manhattan Inv. Fund Ltd., 397 B.R. at 12) (quoting In re Bayou Group, LLC,
362 B.R. at 633)).76
76
In 1992, Gregory Podlucky created Le-Nature’s, Inc., a beverage bottling company. By
“2005, [Le-Nature’s] claimed to be producing nearly 60 different products. The growth in the
alleged variety of products it sold purportedly spurred growth in its gross sales, net sales and
profits.” Id. However, reported sales were drastically overstated because Podlucky was running a
Ponzi scheme. “Krones [another defendant] inflated prices on equipment for new Le-Nature’s
bottling lines and assisted Podlucky and the Insiders in securing financing based on these inflated
prices.” Id. Krones took inflated sales fees from the equipment purchases, and Podlucky
“received excess revenue from the inflated pricing” and financing. See id. Further, “Podlucky and
the Insiders . . . constantly rais[ed] money and incurr[ed] ever-increasing debts to refinance
investors whole[,] cultivating the image of a legitimate profit-making business.” Id. Eventually,
minority shareholders filed suit against the company and Podlucky in the Court of Chancery in
Delaware, the Ponzi scheme fell apart, and Le-Nature’s filed for bankruptcy.
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Fifth Circuit
In 1978, the Fifth Circuit first described Ponzi schemes as follows:
In a Ponzi scheme, a swindler promises a large return for investments made with
him. The swindler actually pays the promised return on the initial investments in
order to attract additional investors. The payments are not financed through the
success of the underlying venture but are taken from the corpus of the newly
attracted investments. The swindler then takes an appropriate time to abscond
with the outstanding investments. As one author has described it, “he borrowed
from Peter to pay Paul. And it worked . . . until Peter got wise.”
United States v. Cook, 573 F.2d 281, 282 n.3 (5th Cir. 1978).77
Later Fifth Circuit cases offer a variety of definitions for Ponzi schemes. In Warfield v.
Carnie, 2007 WL 1112591 at *1 (N.D. Tex.), the Edwardses ran a two-year “prime bank
investment” program known as the “Resource Development International Trading Program
(RDI).” The Edwardses claimed to investors that the “prime bank investments” were “completely
secure-transactions in foreign prime bank securities.” Id. at *2. This investment scheme was the
child of the Dennel investment program, which had been deemed a Ponzi scheme by the SEC and
was shut down in 1999.
After the Dennel program was shut-down, the Edwardses and others began selling
investments in RDI, their own trading program. Acting through [yet another
separate entity], the Edwardses fraudulently collected millions of dollars from
investors, which they, in turn, placed with the fraudulent Dennel program. From
77
In Cook, Larry N. Cook defrauded European, not American, investors. See id. Cook
advertised in various European countries investments in American oil wells and promised returns
of thirty-nine to fifty-six percent, depending on the location of the well. “Once an European
investor decided to purchase an interest in the American oil wells, a contract was signed in
Europe by the investor and a confederate of Cook. The contract would be returned to Dallas and
the agreement was recorded in the United States.” Id. at 238. To attract investors, Cook would
offer some the opportunity to inspect the oil wells in the States, and he paid others the promised
returns. However, the advertised returns were grossly overstated, and the payments were funded
by later investors. In 1976, the scheme failed, and Cook plead guilty to fraud and various
securities violations.
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approximately January 1999 until at least September 2001, RDI collected more
than $73 million from more than 1,300 investors from at least 34 different states.
Id. at *1. However, “the type of investment program described to RDI investors never existed
and the payments that investors received were nothing more than funds provided by new
investors.” The funds collected from RDI were initially used to pay investors from Dennel and
other failed investment programs. Funds were then directed to pay the earlier RDI investors.
Eventually, the Edwardses ran out of investors, and the scheme collapsed. In this case, the district
court relied on Ponzi scheme definitions from the Ninth and Tenth Circuits:
A “Ponzi scheme” is a term generally used to describe an investment scheme that
is not supported by any underlying business venture or investment opportunity but
that has the illusion of profitability in order to recruit more investors and to
sustain the program for the benefit of its operators. The operators induce investors
into the program by promising exorbitant, unrealistic returns on their principal
investments through lucrative investment opportunities or business ventures that
often do not exist. See In re M & L Business Machine Co., 59 F.3d 1078, 1080
(10th Cir. 1995). Typically, the initial investors of the program are paid the
promised returns from either the principal investments of new investors or their
own principal investments. In re United Energy Corp., 944 F.2d 589, 590 n. 1
(9th Cir. 1991).
Id. at *12 n.10. Applying this description to the evidence presented during a summary judgment
proceeding, the court concluded that the Edwardses designed yet another Ponzi scheme in their
series of fraudulent investment programs.
In 1994, R. Allen Stanford began a fourteen-year, multi-billion dollar Ponzi scheme on
the premise that he was selling certificates of deposit in Stanford International Bank (“SIB”).
Janvey v. Alguire, 628 F.3d 164 (5th Cir. 2010). “Stanford achieved and maintained a high
volume of CD sales by promising above-market returns [between 12.7 and 13.39 percent] and
falsely assuring investors that the CDs were backed by safe, liquid investments. . . . In fact,
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however, SIB had to use new CD sales proceeds to make interest and redemption payments on
pre-existing CDs, because it did not have sufficient assets, reserves and investments to cover its
liabilities.” Id. at 169. When the SEC shut SIB down in 2009, SIB reported $7 billion in assets
when, in reality, it had less than $1 billion in assets. In Janvey, the Fifth Circuit explained that
[a] Ponzi scheme is a “fraudulent investment scheme in which money contributed
by later investors generates artificially high dividends or returns for the original
investors, whose example attracts even larger investments.” BLACK’S LAW
DICTIONARY 1198 (8th ed. 2004); see also U.S. v. Setser, 568 F.3d 482, 486 (5th
Cir. 2009) (“in a classic Ponzi scheme, as new investments come in . . ., some of
the new money is used to pay earlier investors”). The Second Circuit also provides
a good description of a Ponzi scheme: A Ponzi scheme is a scheme whereby a
corporation operates and continues to operate at a loss. [“]The corporation gives
the appearance of being profitable by obtaining new investors and using those
investments to pay for the high premiums promised to earlier investors. The effect
of such a scheme is to put the corporation farther and farther into debt by
incurring more and more liability and to give the corporation the false appearance
of profitability in order to obtain new investors.[”] Hirsch v. Arthur Andersen &
Co., 72 F.3d 1085, 1088 n.3 (2d Cir. 1995). This Circuit has found that a Ponzi
scheme “is, as a matter of law, insolvent from its inception.” Warfield, 436 F.3d at
558 (citing Cunningham v. Brown, 265 U.S. 1, 7-8, 44 S. Ct. 424, 68 L. Ed. 873
(1924)).
Id. at 176. Based on this definition and the facts presented, the Fifth Circuit found that the district
court was correct in labeling this investment program a Ponzi scheme.
In 2012, the Fifth Circuit saw yet another oil-based fraudulent investment scheme.
American Cancer Society v. Cook, 675 F.3d 524 (5th Cir. 2012). Between 2007 and 2009, “Giant
Operating . . . raised approximately $13.4 million from investors through five unregistered
securities offerings . . . which promised considerable returns within twelve months.” However,
instead of using only twenty percent of invested funds for managerial expenses, much of the
investor funds were funneled into an account which George Harris “devoted to personal expenses
unrelated to oil-and-gas programs.” Id. at 526. “Harris also transferred millions of
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dollars to defendants Plunkett and Giant Petroleum, another company Harris owned and
controlled. Based on these allegations, the SEC charged multiple violations of federal securities
laws.” Id. at 526-27. In order to claw-back transfers made to various entities, including the
American Cancer Society, the receiver claimed that the investment scheme was “Ponzi-like” in
order to use the “Ponzi presumption” in various fraudulent transfer claims. The receiver
attested that (1) investor funds constituted virtually all of Giant’s revenue; (2)
those funds were commingled and used for personal and unauthorized expenses;
(3) Giant did not operate a profitable business outside of money received from
new investors; (4) investor funds were used to pay “returns” to some investors;
and (5) Giant used some of its funds to procure new investors.
Id. at 527-28. The receiver’s argument was supported only by her affidavit, the SEC complaint,
and three exhibits. In holding the district court erred in finding a Ponzi scheme, the Fifth Circuit
quoted its earlier case as follows: “A Ponzi scheme is a ‘fraudulent investment scheme in which
money contributed by later investors generates artificially high dividends or returns for the
original investors, whose example attracts even larger investments.’” Id. at 527 (citing Janvey v.
Alguire, 647 F.3d 585, 597 (5th Cir. 2011) (quoting BLACK’S LAW DICTIONARY 1198 (8th ed.
2004)). Because the SEC complaint could not be used as evidence, and because neither the
affidavit or the exhibits “demonstrate[d] that investor funds were used to issue ‘returns’ to other
investors--a sine qua non of any Ponzi scheme,” the district court erred in finding a Ponzi
scheme.
Ninth Circuit
Beginning in the 1980s, the Ninth Circuit used the Fifth Circuit’s borrowing-from-Peterto-pay-Paul analogy in identifying a Ponzi scheme, e.g., United States v. Rasheed, 663 F.2d 843
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(9th Cir. 1981). “In early 1977, Rasheed founded the Church of Hakeem.” The Ninth Circuit
explained the precepts of this church as follows:
Rasheed preached about the importance of a positive self-image through belief in
one’s self. He taught that one could achieve one’s desires by focusing and
concentrating on those desires. The central tenet of the Church was the belief in
“the God within you.” One of the aspects of the Church’s beliefs was the law of
increase, or the law of cosmic abundance, which provided that if one gave freely
one would receive returns greater than the initial gift. Shortly after the Church was
founded, Rasheed established the “Dare to be Rich” program. Rasheed preached
that this program was consistent with the law of cosmic abundance. He taught that
if one donated money to the Church, one would receive an “increase of God” of
four times that amount within a particular period of time. The time period of the
increase of God varied depending on the amount of the donation. Fourfold
increases for donations of $1 to $249 were received in 70 days; increases for
donations from $250 to $24,999 in 90 days; increases from $25,000 to $999,999
in 9 months; and increases for donations of $1,000,000 or more in 3 years. These
time periods were based on “psychic birth cycles,” which Rasheed claimed had a
basis in scripture. The cycles were supposed to coincide with levels of
consciousness. The shortest cycle indicated that the donor had not transcended
greed. Thus, donors were encouraged to give large amounts and to redonate their
increases to the program to reach higher levels of consciousness.
Id. at 845-46. In order to participate in the “Dare to be Rich” program, potential members had to
pay an enrollment fee and become a “minister” in the church. Once a “minister,” investors could
donate at gatherings called “celebrations.” “At the end of an increase cycle, an ‘increase letter’
stating the amount of the increase was prepared and given to the donor publicly at a celebration.”
Id. at 846. If the minister wanted to withdraw the increase, the minister could meet with a Church
counselor who would pay the increase in cash but encourage donation of the increase.
Rasheed was apparently very careful not to create the impression that a donation
to the “Dare to be Rich” program created a legal obligation on the part of the
Church to pay the increases of God. He instructed his aides never to tell potential
donors that the Church was making any promise or guarantee of payment. He also
instructed them not to use words like “security” or “stock.” Nonetheless, many of
his aides testified that Rasheed never indicated that there was any doubt that a
donor would receive his increase.
-27-
Id. at 846. Rasheed originally claimed that the increases were profits made from investments in
foreign oil, diamonds, and gold. As the scheme progressed, Rasheed refused to disclose the
source of funds. In fact, “potential donors who questioned the source of the money were told they
could not yet donate to the program because they lacked sufficient faith.” Id. In reality,
“increases” for earlier donations were paid by later donations. In 1979, the “Dare to be Rich”
scheme failed, the IRS seized the church’s assets, and Rasheem was indicted for mail fraud and
other securities violations.
The Ninth Circuit concluded that “[t]he principal evidence of the fraudulent nature of the
program, and of Rasheed’s and Phillips’ knowledge of the deceit, [was] the false impression they
created concerning the source of the funds for the payments of the increases.” Id. at 848. “If the
truth had been revealed” that the source of funds was actually donations from later investors, the
court argued, “a reasonably prudent person would have known that the ‘Dare to be Rich’
program was essentially a Ponzi scheme.” Id.
More recently, the Ninth Circuit has defined a Ponzi scheme as “a phony investment plan
in which monies paid by later investors are used to pay artificially high returns to the initial
investors, with the goal of attracting more investors.” In re Slatkin, 525 F.3d 805, 809 n.1 (9th
Cir. 2008) (quoting Alexander v. Compton (In re Bonham), 229 F.3d 750, 759 n.1 (9th Cir.
2000)). The court has also described a Ponzi scheme as
a financial fraud that induces investment by promising extremely high, risk-free
returns, usually in a short time period, from an allegedly legitimate business
venture. “The fraud consists of funneling proceeds received from new investors to
previous investors in the guise of profits from the alleged business venture,
thereby cultivating an illusion that a legitimate profit-making business opportunity
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exists and inducing further investment.” In re United Energy Corp., 944 F.2d 589,
590 n.1 (9th Cir. 1991). See generally Cunningham v. Brown, 265 U.S. 1, 7-9, 44
S. Ct. 424, 68 L. Ed. 873 (1924).
Donell v. Kowell, 533 F.3d 762, n.2 (9th Cir. 2008); See also Donell v. Ghadrdan, 2013 WL
692853 at *1 (C.D. Cal.) (a Ponzi scheme is “any sort of fraudulent arrangement that uses later
acquired funds or products to pay off previous investors”).78
Eleventh Circuit
In 2011, an Eleventh Circuit bankruptcy court provided one of the more detailed
descriptions of a Ponzi scheme:
[a] phony investment plan in which monies paid by later investors are used to pay
artificially high returns to the initial investors, with the goal of attracting more
investors. United States v. Silvestri, 409 F.3d 1311, 1317 n. 6 (11th Cir. 2005). In
order to prove the existence of a Ponzi scheme, the trustee must establish that: (1)
deposits were made by investors; (2) the debtors conducted little or no legitimate
business operations as represented to investors; (3) the purported business
operations of the debtors produced little or no profits or earnings; and (4) the
source of payments to investors was from cash infused by new investors. Wiand v.
Waxenberg, 611 F. Supp. 2d 1299, 1312 (M.D. Fla. 2009).
78
The facts of Kowell and Ghadrdan fit these similar descriptions. In Kowell, Robert and
his mother Edna claimed that investments in Wallenbrook—a company claiming “to provide
working capital to Malaysian latex glove manufacturers”—would make “a 20 percent return in
ninety days.” Donell v. Kowell, 533 F.3d 762, 767 (9th Cir. 2008). The premise of Wallenbrock’s
enterprise was to purchase the “manufacturers’ accounts receivables at a significant discount. . . .
[and make] a 20 percent return when Wallenbrock collected the receivables from glove
purchasers.” Id. However, Robert and Edna did not buy the accounts receivables with the
invested money as promised; rather, “the officers of Wallenbrock took the investors’ money and
used some of it to pay off earlier investors, some to pay for personal expenses, and some to invest
in risky startup companies.” Id. at 768. Eventually, the scheme collapsed, the SEC began an
investigation, and Wallenbrock was declared a Ponzi scheme. Likewise, in Ghadrdan, John
Farahi used “investor funds [from his company, NewPoint Financial Services, Inc.] to make
interest and principal repayments to previous investors, to pay personal expenses, and to finance
higher-risk futures options.” Donell v. Ghadrdan, 2013 WL 692853 at *1 (C.D. Cal.). His Ponzi
scheme experienced a fate similar to the one in Kowell.
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In re ATM Financial Services, Inc., 2011 WL 2580763, at *4 (Bankr. M.D. Fla.) (Footnotes
included in paragraph).79
Two recent bankruptcy cases in the Eleventh Circuit generally define a Ponzi scheme as
“paying existing investors with deposits from new and existing investors.” Wiand v. Morgan,
2013 WL 247072 at *13 (M.D. Fla.). Although the bankruptcy receiver did not specify the exact
start date of the Ponzi scheme, the court concluded that between 1999 and 2009, Arthur Nadal
seriously misrepresented Scoop Capital, LLC’s hedge fund performance:
Nadel pooled funds received from investors and deposited into accounts,
commingled these funds with other investors’ money, and transferred the money
from those accounts into other bank, brokerage, and trading accounts in which the
money was further pooled and commingled with other investors’ money. [An
expert opined] that her review revealed that “Nadel pooled and commingled
investors’ monies regardless of with which Hedge Fund the monies had been
invested; that Nadel not only commingled the monies in these accounts, he would
also transfer funds into the brokerage accounts as necessary in order to have
sufficient funds from which to pay redemptions; and that these funds would be
transferred from the Hedge Fund brokerage account to the Hedge Fund bank
account from which the investor would receive his or her redemption.”
Id. at * 11. The expert further opined:
Hedge Funds always had significantly less money in the financial accounts than
the amounts deposited by investors. . . . Nadel represented to investors that he
had achieved high rates of return in order to induce investors to invest . . . and
Nadel utilized investor principal to pay new investors, and . . . used investor
monies from the hedge funds to pay for Traders’ investors’ redemptions.
79
In 2004, Kapila claimed to be in the business of buying, selling, and managing ATM
machines and managed to raise over $80 million in investments. In reality, the ATM’s Kapila
claimed to purchase, sell, and manage never existed. Instead, “withdrawal fees”—or returns on
the investment—were paid by new investors. Because no underlying business existed, the
scheme collapsed in 2008, the company was deemed a Ponzi scheme, and Kapila and his partner
served eight years in federal prison for wire fraud.
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Id. Based on these facts, the court concluded that the receiver had sufficient evidence to prove
that Nadel had perpetuated a “classic Ponzi scheme.”
In In re World Vision Entertainment, 275 B.R. 641 (Bankr. M.D. Fla. 2002), Jamie
Piromalli formed World Vision Entertainment, Inc., an entertainment investment company.
World Vision Entertainment sold unsecured notes that carried ten to twelve percent interest and
matured in nine months. At the end of the nine months, noteholders could collect the principal
and interest, but Piromalli frequently convinced noteholders to reinvest for an additional term. To
convince people to invest, “[Piromalli] produced and distributed slick, professional marketing
materials touting its business and describing the note program,” which did not mention the risks
of the notes. Id. at 646. “Further, to allay concerns or quell any investor anxiety, investors
received certificates of insurance allegedly guaranteeing repayment.” Id. However, Piromalli’s
note program—which consisted of a large network of brokers and insurance agents—was too
complex and required too much overhead. In fact, the rate of return associated with the note
program was so high that “the debtor needed to generate a return of between 30.90 and 34.90
percent to pay these direct costs associated with the sale of the notes.” Id. Further, the companies
Piromalli invested in were mostly shams. Due to all of this, the bankruptcy court described the
scheme as “[a] textbook Ponzi scheme” and explained:
None of the debtor’s investments ever produced any income or revenue. The
debtor's primary source of funds was through the sale of its promissory notes. The
debtor used funds invested by new investors to make interest and principal
payments to earlier investors. Any remaining funds were used to pay general and
administrative expenses such as officer salaries and rent, to make occasional
investments in companies not expected to generate any substantial return, and to
enrich the debtor’s insiders.
Id. at 648-49.
-31-
Tenth Circuit
In 1984, Judge Allen created a definition for a Ponzi scheme that has been generally used
by courts in this Circuit for over three decades. He stated:
A “Ponzi” scheme, as that term is generally used, refers to an investment scheme
in which returns to investors are not financed through the success of the
underlying business venture, but are taken from principal sums of newly attracted
investments. Typically, investors are promised large returns for their investments.
Initial investors are actually paid the promised returns, which attract additional
investors.
In re Independent Clearing House Co., 41 B.R. 985, 994 n.12 (Bankr. D. Utah 1984) (citations
omitted). In 1980, Independent Clearing House Co. began an investment scheme in which private
investors would assume and pay the accounts payable of various companies. Allegedly, profits in
the scheme consisted of “discounts negotiated with the creditors of the client companies and the
sums repaid by the client companies.” Id. at 993-94. While the investment scheme existed,
“investors received contractual returns of” 8.4 percent. Id. But, “[n]o client companies existed
whose accounts payable were paid by the debtors in accordance with the program as represented
to investors, and no profits or earnings were ever produced by the purported accounts
payable program.” Id. Instead, returns were paid by the funds received from new investors.
Because of this, the court concluded that the investment program was a Ponzi scheme “in which
fictitious profits were paid to investors from the principal sums deposited by subsequent
investors.” Id. Further, “[t]he debtors were insolvent from the moment of the execution of the
first investor contract, and became more insolvent with each successive contract.” Id. Because of
the scheme, over nine-hundred investors “received no returns and lost all of their original
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investments.” Id. at 995. The scheme collapsed, Independent Clearing House Co. declared
bankruptcy, and multiple people were charged with various crimes, including racketeering.
Three years later, this court elaborated on this definition in an en banc consolidated
appeal from Judge Allen in the same case, In re Independent Clearing House Co., 77 B.R. 843
(D. Utah 1987). The consolidated appeals arose out of numerous claims the bankruptcy trustee
had made in connection with recouping money from investors because of voidable preferences
and fraudulent transfers. In deciding that the receiver could recover some of the preferences and
transfers, this court quoted Judge Allen and noted that Ponzi schemes are inherently fraudulent:
One can infer an intent to defraud future undertakers from the mere fact that a
debtor was running a Ponzi scheme. Indeed, no other reasonable inference is
possible. A Ponzi scheme cannot work forever. The investor pool is a limited
resource and will eventually run dry. The perpetrator must know that the scheme
will eventually collapse as a result of the inability to attract new investors. The
perpetrator nevertheless makes payments to present investors, which, by
definition, are meant to attract new investors. He must know all along, from the
very nature of his activities, that investors at the end of the line will lose their
money. Knowledge to a substantial certainty constitutes intent in the eyes of the
law, cf. Restatement (Second) of Torts § 8A (1963 & 1964), and a debtor’s
knowledge that future investors will not be paid is sufficient to establish his actual
intent to defraud them. Cf. Coleman Am. Moving Servs., Inc. v. First Nat’l Bank &
Trust Co. (In re American Properties, Inc.), 14 Bankr. 637, 643 (Bankr. D. Kan.
1981) (intentionally carrying out a transaction with full knowledge that its effect
will be detrimental to creditors is sufficient for actual intent to hinder, delay or
defraud within the meaning of § 548(a)(1)).
Id. at 860. This court also noted that “[b]y definition, an enterprise engaged in a Ponzi scheme is
insolvent from day one.” Id. at 871. Because of this, the transfers made to investors were
preferential and fraudulent.
Around the time the Independent Clearing House Co. collapsed, Perry S. McKay used his
computer sales company as a front for a Ponzi scheme. Jobin v. McKay, 84 F.3d 1330 (10th Cir.
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1996). “[T]he M & L officers solicited investments by promising extremely high rates of return
[in this case, at least ten percent per month]. Upon receiving money from investors, M & L
issued promissory notes and paid the promised sums with postdated checks drawn on company
accounts.” Id. at 1331. Unfortunately, the company could not sustain such high rates of return,
and in 1990, the company filed for bankruptcy, and the Ponzi scheme was discovered. In
classifying McKay’s scheme as a Ponzi scheme, the Tenth Circuit cited to Judge Allen’s
definition. Id.
While the case reached the Tenth Circuit in the same year as Jobin, the Ponzi scheme in
Sender v. Simon, 84 F.3d 1299 (10th Cir. 1996), began in the late 1970s. At that time, Mr.
Donahue created Hedged-Investment Associates to run the Hedged Investments investment fund.
Donahue promised investors returns of fifteen to twenty-two percent based off of his
“sophisticated, computer-based strategy for trading in hedged securities options.” Id. at 1301.
However, “Mr. Donahue failed to maintain separate accounting records for the Debtor
Partnerships and commingled investors’ funds into a single checking account held in the name of
HIA Inc. . . . Mr. Donahue treated the investors as if they were direct participants in a single
investment pool instead of investors in discreet limited partnerships.” Id. at 1301-02. The Court
further explained:
[I]n most years the Hedged Investments operation realized net trading losses, and
in all years Mr. Donahue substantially overstated the fund’s performance. From
1982 onward the fund was insolvent in that its cumulative losses exceeded its
cumulative gains. To prevent investors from discovering the fund’s poor
performance, Mr. Donahue falsely reported high earnings. When an investor
sought to withdraw money from his account on the basis of these reported
earnings, Mr. Donahue – because the fund had no real cumulative earnings –
apparently paid the withdrawal from the capital contributions of other investors.
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Id. In 1990, the scheme collapsed, Hedged Investment Associates filed for bankruptcy, and
Donahue was sent to federal prison. In describing this investment plan as a Ponzi scheme, the
Court cited Judge Allen:
A Ponzi scheme is a fraudulent investment scheme in which “profits” to investors
are not created by the success of the underlying business venture but instead are
derived from the capital contributions of subsequently attracted investors. Sender
v. Nancy Elizabeth R. Heggland Family Trust (In re Hedged- Investments Assocs.,
Inc.), 48 F.3d 470, 471 n.2 (10th Cir. 1995). For an informative discussion of
Ponzi schemes and their namesake, Charles Ponzi, see Merrill v. Abbott (In re
Independent Clearing House Co.), 41 Bankr. 985, 994 n.12 (Bankr. D. Utah
1984).
Id. at n.1.
In 2008, the Tenth Circuit added another definition of Ponzi to its repertoire. In 20002001, NSFF—a non-profit organization—began soliciting schools to purchase physical fitness
programs through NSFF’s “Leasing Model.” Mosier v. Callister, Nebeker & McCullough, P.C.,
546 F.3d 1271, 1273 (10th Cir. 2008). The Tenth Circuit described the “Leasing Model” as
follows:
(1) NSFF solicited schools to purchase its physical fitness programs; (2) interested
schools were directed to enter into a sales contract with a for-profit company
organized by NSFF’s principals, called School Fitness Systems, LLC (“SFS”); (3)
the schools paid SFS directly and financed the purchase by obtaining a three-year,
non-recourse lease from an institutional lender; (4) NSFF entered into a
“contribution agreement” with each school through which NSFF contracted to
make monthly payments to the school in an amount equal to the monthly lease
obligation the school owed to its institutional lender; (5) after receiving payment
from the schools, SFS kicked back approximately 50% of those proceeds to
NSFF; (6) NSFF agreed to repay the schools the full purchase price for the
physical fitness program over the course of the three-year lease and advertised the
program as “free” to the schools.
Id. Although NSFF claimed funds for payments came from government grants and/or charitable
contributions, nearly all payments came from the proceeds of later sales to other schools.
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Under its Leasing Model, NSFF was therefore operating a fraudulent “Ponzi”
scheme. Because it never had sufficient assets, grants, or charitable contributions
to meet its obligations to the schools, and because the stream of revenue from
SFS’s sales to new schools was insufficient to fund NSFF’s continuing
obligations to previously solicited schools, NSFF incurred a mounting, unfunded
liability that eventually led to its insolvency and petition for bankruptcy on June 1,
2004.
Id. In Mosier, the court defined a Ponzi scheme as follows:
A Ponzi scheme is “[a] fraudulent investment scheme in which money contributed
by later investors generates artificially high dividends for the original investors,
whose example attracts even larger investments. Money from the new investors is
used directly to repay or pay interest to earlier investors, usually without any
operation or revenue-producing activity other than the continual raising of new
funds.” BLACK’S LAW DICTIONARY 1198 (8th ed. 2004).
Id. at 1273 n.2.
After Mosier, Tenth Circuit courts have followed a mix of Mosier and Independent
Clearing House Co..
Before its collapse in 2007, Twin Peaks Financial Services Inc., was running a real estate
business dealing with properties in Utah and Salt Lake Counties. Gillman v. Ponzi Issue, 2012
Bankr. LEXIS 3763 (Bankr. D. Utah). Properties were acquired through hard money loans, Twin
Peak’s bank accounts, and investors. Twin Peaks promised returns of fifteen to eighteen percent
to its investors. However, “The combination of the high interest rate plus the loan fees on such
short term investments resulted in extremely high promised rates of return for Investors which
equated to an effective annual rate of return of 30 to over 200 percent on the money loaned.” Id.
at *8. Unfortunately, “the cash receipts from business operations was never sufficient . . . [to]
cover those amounts repaid to Investors. . . . [and] the only other source of funds which could
cover this discrepancy were funds received from other Investors, and it was apparent that the
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Debtor had to rely on funds received from subsequent Investors to service the obligations owed
to earlier Investors.” Id. at *9. As such, the scheme collapsed, and Twin Peaks filed bankruptcy
in 2007. When classifying this as a Ponzi scheme, Judge Mosier cited to Independent Clearing
House Co., but added the following:
Therefore, four characteristics of a Ponzi scheme include the following, all of
which are present here:
a. The returns to investors were not financed through the success of the
underlying business venture.
b. The returns to investors were taken from newly attracted investments.
c. Investors were promised large returns.
d. Initial investors received promised returns, which attracted additional
investors.
Id. at *12. Because these four characteristics were found in the Twin Peaks scheme, Judge
Mosier deemed it a Ponzi scheme.
In In re Waterford Funding, 2012 Bankr. LEXIS 873 (Bankr. D. Utah), Waterford
Funding issued promissory notes with rates between eight and forty-four percent, with some
default rates over three-hundred percent. Wright promised that invested funds “would be
deposited in a common fund and then loaned out on commercial real estate projects at no more
than 50% loan to value ratio.” Id. at *6-7. In order to cover the high interest rates, however,
Waterford paid the interest rates with money from new investors. Relying on the Black’s Law
Dictionary definition, Judge Mosier found this scheme to be a Ponzi scheme and deemed it
insolvent since 1999.
In Okla Dep’t of Sec. Ex rel. Faught v. Wilcox, 691 F.3d 1171 (10th Cir. 2012), Martha
Schubert was a registered agent in Oklahoma working for two companies. Unbeknownst to either
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company, Martha was also “offering and selling so-called Investment Program Interests to
individual clients.”
Schubert directed investors to make their checks payable to her personally or to
Schubert and Associates. . . . Schubert did not disclose to investors how she
would invest their money, but generally stated that the money would be used to
make trades in option contracts, and she promised that the investments were fool
proof and would yield thirty percent (30%) annual interest. Schubert’s program,
however, was a sham. . . . Schubert used new investor money to pay principal
and/or profits to investors who had previously invested.
Id. at 1177-78 (quotations and citations omitted). The Tenth Circuit concluded this was a Ponzi
scheme, relying on the Black’s Law Dictionary definition.
Summary and Definition of “Ponzi scheme”
Courts around the country have defined a Ponzi scheme in various ways. Even within the
Tenth Circuit, several definitions and descriptions are used. Yet, all of the definitions and
descriptions have a common base: a Ponzi scheme is a fraudulent investment scheme in which
“returns to investors are not financed through the success of the underlying business venture, but
are taken from principal sums of newly attracted investments.” In re Independent Clearing
House Co., 41 B.R. at 994 n.12.
In order to show that an investment scheme falls within the definition of a Ponzi scheme,
the Receiver must prove by a preponderance of the evidence the sine qua non of a Ponzi scheme:
that returns to earlier investors were paid by funds from later investors. See American Cancer
Society v. Cook, 675 F.3d 524 (5th Cir. 2012).
It is also important that the Receiver shows that returns to investors could not be paid by
the underlying business venture. As described above, numerous Ponzi schemes have involved
seemingly legitimate business ventures. See Boyle v. Gray, 28 F.2d 7 (1st Cir. 1928) (Ponzi
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scheme involved a fox breeding business); In re Le-Nature’s, Inc., 2009 U.S. Dist. LEXIS 85073
(W.D. Penn.) (Ponzi scheme involved a beverage bottling business); Gillman v. Ponzi Issue,
2012 Bankr. LEXIS 3763 (Bankr. D. Utah) (Ponzi scheme involved real estate investment
company). However, in all of the cases, whatever underlying business venture existed yielded
insufficient funds to pay for expenses and provide promised returns to investors. On the other
hand, if an investment scheme generates sufficient funds from legitimate sources to pay
investors, it is unlikely that the scheme is a fraudulent Ponzi scheme.
Other factors, though non-essential to the definition of a Ponzi scheme, have been used
by courts to decide if an investment scheme fits into the Ponzi definition. These include the
promise of large returns;80 the promise of returns with little to no risk;81 the promise of consistent
returns;82 the delivery of promised returns to earlier investors to attract new investors;83 the
general insolvency of the investment scheme from the beginning;84 the secrecy, exclusivity,
and/or complexity of the investment scheme;85 and the general stability of the investment
scheme, among other factors. Although the presence or absence of these factors does not
necessity make or break a Ponzi scheme, these factors are typically present in Ponzi schemes.
80
See United States v. Cook, 573 F.2d 281, 282 n.3 (5th Cir. 1978).
81
See U.S. Securities and Exchange Commission, Ponzi Schemes—Frequently Asked
Questions, at http://www.sec.gov/ answers/ponzi.htm (last visited June 18, 2013).
82
Id.
83
See Gillman v. Ponzi Issue, 2012 Bankr. LEXIS 3763 (Bankr. D. Utah).
84
See In re Bernard L. Madoff Investment Securities LLC, 458 B.R. 87 (Bankr. S.D.N.Y.
85
See e.g. United States v. Rasheed, 663 F.2d 843 (9th Cir. 1981).
2011).
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CONCLUSION
This is a unique case. It is by no means a simplistic duplicate of Charles Ponzi’s scheme
of borrowing money for a short term from a multitude of persons based on promised high interest
rates (sometimes as high as fifty percent), backed by no assets, with only his self-promoted
rumors of success in arbitrage in foreign postal stamps. Ponzi’s scheme was assetless from the
beginning and destined for inevitable failure when new money could not meet ever-expanding
new promises and existing obligations. Nor is it Bernard Madoff’s similarly assetless shell.
This case is far more complex. Searching analysis is needed to penetrate the maze of facts
and transactions which occurred over many years—beginning, the Receiver asserts, in
1996—and to try to bring some semblance of an ordered picture out of MSI’s chaos. Because of
the manner in which this receivership is proceeding—dealing with 208 entities, real or pretended,
and hundreds of transactions of various kinds over a period of years which may involve some
innocent or some culpable participants—it is difficult to characterize all of such transactions as
Ponzi-related. This is of some moment to the intervenor objectors in this particular matter
because each is or may be a target for a claw-back action by Receiver, and each is concerned that
a blanket finding in this proceeding may subject them to a “presumption of Ponzi fraud” in a
present or future claw-back action with attendant shifting burdens of proof.86
The purpose of the Receiver’s motion is to gain an early overall characterization of a
86
(See Tr. at 558 (“That is in particular unfair when it is the entire purpose of this
proceeding, the receiver asking the Court to declare that this is a Ponzi scheme, is so that the
receiver can use that conclusion in 40 clawback actions filed separately in order to invoke the
Ponzi presumption and make it easier to sue people like my clients and the McDermotts and
hopefully regain money that they think has been improperly paid.”).)
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Ponzi scheme in order to take future advantage of the “Ponzi presumption”, a pleading benefit in
classic Ponzi scheme cases for use by the Receiver in ancillary cases where he seeks
disgorgement from early investors or other beneficiaries who may have received payments
sourced solely from monies contributed by subsequent investors.
The classic case where a “Ponzi presumption” is available is a fraud from the beginning,
no assets other than investor contributions, no legitimate business, commingled investment
funds, and preferential transfers to early investors from the contributions of subsequent investors.
The effort in such a case is to recover the preferential transfers so that all similarly situated
investors may share in the benefit as well as the pain.
In such classic examples, the “Ponzi presumption” provides a receiver with a pleading
advantage and shifts the burden of showing legitimacy of the benefits received to the target.
An effort to apply such a “Ponzi presumption” in all securities fraud cases which have
some Ponzi scheme characteristics is inappropriate. The Receiver’s proposed blanket finding and
its contemplated future use is far too simplistic in this context, and may penalize innocent action
as far as the objectors are concerned—not for Ponzi-related and inappropriate action on their
part, if any, but for the Jacobsons’ actions, not their own.
In short, the intervenor objectors have a point. In cases short of the classic Ponzi scheme
case, the “Ponzi presumption” is no substitute for proof.
One cannot cloak all of Jacobsons’ activities as one grand scheme, however labeled.
Jacobson activity seems to flow in waves, often directed by the availability of money from
whatever source. Some money seems to be capable of tracing. Some is lost in commingling.
Some activities seem regular, such as the actual sale of a specific interest in some properties to a
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third party not affiliated with a guaranteed five to eight percent return. Often a bank loan with
pledged security seems to be regular, even though loan proceeds may have been used by the
Jacobsons for purposes other than what they told the bank, such as paying or crediting prior
investors their monthly “return”.
The enterprise, as far as Jacobsons’ actions are concerned, seems unitary and seems to
ebb and flow, sometimes fish, sometimes fowl, sometimes legitimate, sometimes patently
unlawful. Often it seems, depending on the time and context, a particular transaction might be
subject to a “Ponzi presumption” which itself may be refutable, and at other times, depending on
the time and context, another particular transaction may not.
As to the Jacobsons, the finding requested by the Receiver is unnecessary because of their
agreements with the SEC and the final consent judgments entered by the Court. As to
intervening objectors and others who may be subject to claw back, it depends on time, context,
the nature of the specific transactions, and the knowledge of the parties. Each needs to be
examined on an individual basis.
One need recognize in equity that similar does not mean identical. Context drives.
Burdensome as it may be, fairness demands individual examination. Due process does as well.
Presumption is but a tool. It is not a shortcut or substitute for proof. In the finding of Ponzi
schemes, it is applicable where appropriate and if not, then proof of inappropriate activity on the
part of a target, not the mere affixing of a label by the Receiver, is required.
It seems to me that the “Ponzi presumption”, in equity, as to third parties, should be of
limited use—indeed, only in those cases as blatant and as plain as the original Charles Ponzi case
and the more recent Madoff case: assetless and fraudulent from day one.
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This is not that case. The Receiver asserts this was a Ponzi scheme from the
beginning—claimed to be April 1, 1996—and the intervenor objectors assert this was not a Ponzi
scheme at all. In a sense, each is correct. Depending on time, circumstance, and transaction, the
Jacobson enterprise has, of course, many Ponzi characteristics which often come and go
depending on time, circumstance, money source, and transaction.
Often inappropriate activities by the Jacobsons, such as commingling or self-dealing (or
on occasion, conversion or securities violations) have resulted in the Receiver succeeding to and
administering substantial identifiable tangible assets, the origin of the funding for which is
difficult or impossible to trace.
Like most equitable matters of complexity, the history of MSI and related entities
displays characteristics of commercial schizophrenia—a split personality—which compels us in
future actions by the Receiver to look at transactions closely, at the specific facts and
circumstances of each transaction, free from any alleged, all-embracing presumption, but footed
on whether a target of the Receiver’s action has received funds or assets knowingly, unfairly, or
unlawfully.
For the foregoing reasons, the Receiver’s motion—which requests this Court identify the
entire MSI enterprise as a Ponzi scheme and determine a start date of April 1, 1996 for the MSI
Ponzi scheme—is DENIED.
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SO ORDERED.
DATED this ~ day of August, 2013.
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