Net winners in a Ponzi scheme – those who have profited – often get sued to return the profits paid to them. Those who lost money (net losers) usually don’t get sued, unless they were not in "good faith." It is a bankruptcy trustee or regulatory receiver calling the shots of who does and doesn’t get sued in the process of unraveling a Ponzi scheme in a subsequent insolvency proceeding.
When it comes time to distribute recovered funds to investors, the net winners and net losers frequently do battle over the type of distribution made out of an insolvency proceeding, with each faction fighting for a bigger slice of the pie. Either the priority scheme in the Bankruptcy Code or a court-approved distribution plan will govern how money is to be distributed.When there is no bankruptcy or receivership proceeding to supervise the administration and distribution process, then what? Net winners are sitting on the profits paid to them, having recovered their original investment plus some. But what about the net losers? Where does the money come from to make net losers whole?
In Carroll v. Stettler, 2013 U.S. Dist. LEXIS 76519 (E.D. Pa. May 31, 2013), the net losers opted for self-help. In that case, the net losers sued the net winners to recover the profits paid to those net-winning investors. This latest decision in a series of decisions handed the net losers a summary judgment, making the effort to take matters into their owns hands worthwhile.
The case arose out of a scheme run by Lizette Morice through her company Gaddel Enterprises, Inc. Gaddel claimed that it purchased properties that were in tax foreclosure at a substantial discount and then sold the properties at a large profit. Morice and others solicited more than $7,000,000 from individuals by offering a share of the profits for a minimum of a $1,000 investment. No real estate transactions were ever conducted and most investors lost their entire investment. Gaddel did, however, pay some investors returns on their investments of over $5.1 million with funds from other investors. So, in classic Ponzi tradition, there were a few net winners and many net losers.
Morice admitted to running a Ponzi scheme in her criminal proceeding, and the net losers of the scheme were left to their own resources in attempting to recover their losses. A few years ago, they filed a class action against the net winners seeking avoidance of Gaddel’s actual fraudulent transfers under state law. And so far at least, the case has been largely successful. The district court has:
- Denied a motion to dismiss filed by the net winners, 2010 U.S. Dist. LEXIS 120672 (Nov. 12, 2010);
- Granted class action certification for a class of 2,627 plaintiffs, 2011 U.S. Dist. LEXIS 121171 (Oct. 19, 2011);
- Granted approval of a partial class action settlement in which some defendants agreed to pay $739,164.10, which is 80% of Gaddel’s transfers to them, 2011 U.S. Dist. LEXIS 121185 (Oct. 19, 2011);
- Granted most of the plaintiffs’ motion for default judgments against the defendants who did not file timely answers, 2012 U.S. Dist. LEXIS 113660 (E.D. Pa. Aug. 10, 2012);
- Granted in part the plaintiffs’ motion for summary judgment against the insider defendants, finding that Gaddel did perpetrate a Ponzi scheme; that under the Ponzi presumption, all challenged transfers were with actual fraudulent intent, and that the only triable issues related to the defendants’ good faith value defense, 2013 U.S. Dist. LEXIS 56080 (E.D. Pa. Apr. 18, 2013); and
- In the most recent decision, granted in part the plaintiffs’ motion for summary judgment against the other defendants, entering judgment against many of the non-insider defendants, 2013 U.S. Dist. LEXIS 76519 (E.D. Pa. May 31, 2103).