Wednesday, December 16, 2009

Federal Judge Suggests The SEC Should Go After Ponzi Investors For Profit & Principal

Shannon P. Duffy at has an article titled "Federal Judge Takes Issue With SEC's Treatment of Ponzi Scheme 'Winners'."  Judge Paul S. Diamond, a Judge in the United States District Court for the Eastern District of Pennsylvania, issued an eleven page order (HERE) stating:
Ponzi schemes are pernicious because they masquerade as legitimate investments. In fact, only a very few early “investors” recover their principal and earn profit – paid entirely from the monies provided by later “investors,” who commonly lose everything.
When claims are brought against Ponzi scheme investors, “the general rule is that to the extent innocent investors have received payments in excess of the amounts of principal that they originally invested, those payments are avoidable as fraudulent transfers.”
The SEC and CFTC have apparently adopted a nationwide policy that there can be no recovery of principal from winning Ponzi scheme investors even when the investors should have seen “red flags” alerting them to the true nature of their “investments.”
First, as I have shown, there is “statutory and case law support” for the Receiver’s recovery of principal. In any event, I agree with the SEC that truly “innocent” investors who acted “in good faith” should not be compelled to return their principal to the Receivership Estate. It does not appear, however, that Mr. Hoyle or the Receiver seek such a result. Rather, they could recoup principal only when an investor is not “innocent” or has not acted in “good faith.”...If Mr. Hoyle is successful, this would allow the Receiver to increase significantly the funds she could distribute pro rata to all Mr. Forte’s victims...Accordingly, it could well be more equitable and legally supportable for the SEC and the CFTC to support the Receiver’s original plan: “as PUFTA provides, [to file] suit to recover the entire fraudulent transfer from all Limited Partner net winners” - both the profits and the principal.
It will be interesting to see how this theory plays into the Scott Rothstein ponzi scheme.


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