Tag Archives: receiver

September 9, 2013

When an SEC Equity Receiver may, and may not, Use the “Ponzi Presumption” in Fraudulent Transfer Cases

Charles Ponzi’s scheme through which he convinced investors to lend him money which he promised to repay at high interest rates, was completely unsupported from its inception by any assets or legitimate business.  High rates of return were promised to investors, and those returns were financed exclusively from funds raised from new investors.  The payment of these high returns allowed Ponzi to attract new investors. This type of classic Ponzi scheme is insolvent and fraudulent from its inception.  An equity receiver appointed in such a classic case enjoys the “Ponzi presumption,” an evidentiary presumption that establishes, solely on the basis that the perpetrator was operating a Ponzi scheme, that the perpetrator’s transfers during the course of the scheme were made with actual intent to hinder, delay or defraud creditors.  This presumption shifts the
burden of proving the legitimacy and good faith of the transfer to the defendant.

However, throughout the years, other fraudulent schemes which are nevertheless backed in part by some assets or a legitimate business have exhibited characteristics of a Ponzi scheme.   In these cases, is the equity receiver entitled to the same “Ponzi presumption” which applies in classic Ponzi cases?  The United States District Court for the District of Utah has held that an equity receiver in a non-classic Ponzi case cannot avail himself of the Ponzi presumption. Securities and Exchange Commission v. Management Solutions, Inc. et al, 2:11-cv-1165BSJ, Doc. 1215 (D. Utah August 22, 2013). 

In Management Solutions, the receiver filed a number of ancillary actions seeking to recover monies transferred by Management Solutions, Inc. (“MSI”) to various investors.  Seeking to rely on the “Ponzi
presumption” to establish that the transfers were made with actual intent to hinder, delay or defraud creditors, 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.  Several of the defendants targeted in the Motion objected to the relief sought.

In determining the receiver’s request, Judge Bruce Jenkins provided an in-depth examination of the history of Ponzi schemes and their historical treatment by the courts.  Judge Jenkins examined the case law from the various circuits addressing the elements necessary to establish the existence of a Ponzi scheme.  From that examination, Judge Jenkins noted that “courts around the country have defined a Ponzi scheme in various ways.”  However, he also concluded that all of the definitions 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,’” citing In re Independent Clearing House Co., 41 B.R. 985, 994 n. 12 (Bankr. D. Utah 1984). 

Judge Jenkins noted that the facts in the MSI case established that MSI was not operating a classic Ponzi scheme because its business operations included substantial real estate business operations which generated substantial revenues.  Because MSI engaged in legitimate business operations, Judge Jenkins found that its scheme was not a “classic” Ponzi scheme in the nature of that run by Charles
Ponzi.  Consequently, in assessing the receiver’s Motion, Judge Jenkins held that, in order to establish that a fraudulent investment scheme is a Ponzi scheme, a receiver must establish by a preponderance of the evidence two things:  (1) that returns to earlier investors were paid by funds from later
investors and (2) that returns to investors could not be paid by the underlying legitimate business venture. 

Judge Jenkins held that the Ponzi presumption is appropriate in classic cases, where the scheme is “fraudulent from the beginning, with no assets other than investor contributions, no legitimate business, commingled investment funds, and preferential transfers to early investors from the
contributions of subsequent investors.” However, he ruled that use of the presumption in cases where the perpetrator’s operations include legitimate business functions but also represent some characteristics of a Ponzi scheme is inappropriate and might actually penalize innocent conduct.  The
court stated that the Ponzi 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.”  Judge Jenkins ended his Memorandum Opinion by stating that the Ponzi presumption should be of limited use and applied 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.”

August 26, 2013

Tenth Circuit Set Parameters of Application of UFTA Statute of Limitations on SEC Equity Receiver’s Claims for Fraudulent Transfer

In a recent opinion, the Tenth Circuit Court of Appeals addressed several issues relating to the application of the statute of limitations in the Uniform Fraudulent Transfer Act on fraudulent transfer
claims asserted by an equity receiver appointed in an SEC civil enforcement action.  The decision was rendered in Wing v. Buchanan (Tenth Circuit No. 12-4123, August 9, 2013). 

Wing was appointed receiver for VesCor Capital, Inc. and a number of its affiliates in connection with a civil enforcement action brought by the SEC.  Prior to the filing of the SEC action, VesCor Capital, Inc. filed a voluntary bankruptcy petition under chapter 11 of the Bankruptcy Code.  However, the affiliates involved in the receivership proceeding did not file bankruptcy petitions.  The bankruptcy court ordered the appointment of a chapter 11 trustee approximately seven months before the SEC action was commenced and ten months before the receiver was appointed. 

Wing filed an action against Buchanan seeking to recover payments made by VesCor Capital and several of its affiliates under the UFTA, alleging that VesCor operated a Ponzi scheme and, therefore, these payments were “by definition, made to hinder, delay or defraud creditors and/or investors of VesCor.”  The timing of the filing of the receiver’s complaint was a critical fact in the dispute:  it was filed more than four years after the transfers in question, more than one year after the appointment of the bankruptcy trustee, but within one year of the receiver’s appointment.  Buchanan alleged that the complaint was barred by the statute of limitations found at Utah Code § 25-6-10.  That statute provides that an action seeking to recover transfers based on allegations of actual fraud must be filed within four years after the transfer was made or, if later, within one year after the transfer was or could reasonably have been discovered by the claimant.  The district court rejected Buchanan’s argument and entered summary judgment in favor of the receiver.

The Tenth Circuit began its analysis by concluding that Utah would adopt the adverse domination theory so that the discovery period for such transfers would not begin to run until the bad actors controlling the entity were removed.  The adverse domination theory recognizes that control of the transferor by its bad actors precludes the possibility of filing suit because these individuals would have no motivation to reveal their fraud by filing suit to claw back fraudulent transfers.  The Tenth Circuit ruled that limitations did not begin to run until Val Southwick, the bad actor controlling
the VesCort entities, was removed from control.

That holding lead to the next question—whether Southwick was “removed” for purposes of the statute when the bankruptcy trustee was appointed in the VesCor Capital bankruptcy case, or whether it began running when the receiver was appointed in the SEC action.  Because some of the transfers were likely made by entities that had not been included in the bankruptcy proceedings, the Tenth Circuit vacated the summary judgment in favor of the receiver and remanded the case to the district court to determine which of the transfers could reasonably have been discovered by the bankruptcy trustee, thereby triggering the statute of limitations on the trustee’s appointment.

The receiver raised two arguments before the appellate court which were rejected.  First, he asserted that limitations could not begin running on the trustee’s appointment because the
receiver is the “claimant” for purposes of the UFTA.  The court rejected that argument, ruling that
it is the companies in receivership and their creditors who are claimants that benefit from the discovery rule, and if their claims are barred by limitations, a subsequent appointment of a receiver will not resurrect otherwise stale claims.  The court also noted that such an interpretation would enable receivers to manipulate the statute by causing a receivership entity to file a bankruptcy petition and thereby gain the commencement of a new statute of limitations on claims that may be barred in the receiver’s hands.  Wing also asserted that the district had equitable discretion to disregard the statute of limitations altogether, citing the Tenth Circuit’s statement in SEC v. VesCor Capital Corp., 599 F.3d 1189, 1194 (10th Cir. 2010) that a “district court has broad powers and wide discretion to determine relief in an equity receivership.”  The court stated that the receiver had
misinterpreted this prior language. The court explained that a district court sits in equity when determining the distribution of assets already in a receiver’s control, but that a district court does not sit in equity when adjudicating a receiver’s claims against third parties to recover property.