Kathy Bazoian Phelps
Senior Counsel in Ponzi Scheme Litigation
and Bankruptcy Matters

Kathy is a senior business trial attorney with more than 30 years experience prosecuting and defending claims for high net worth clients involved in Ponzi scheme matters and in bankruptcy proceedings. Kathy’s practice includes recovering assets for clients in complex fraud cases under standard fee and alternative fee arrangements. She also handles SEC and CFTC whistleblower claims. Kathy also serves as a mediator in bankruptcy matters, in complex business disputes, and in matters requiring detailed knowledge about fraud or Ponzi schemes.

Kathy’s Clients in Ponzi Scheme Cases and Bankruptcy Matters
Equity Receivers
Bankruptcy Trustees
High Net Worth Investors
Debtors in Bankruptcy
Secured and Unsecured Creditors

Friday, April 27, 2012

Arbitration Award Against Wachovia Securities in Derivium Capital Ponzi Case

Posted by Kathy Bazoian Phelps

The latest buzz in the Ponzi world is over the $852,000 arbitration award that former Congressman Alan Grayson won against Wachovia Securities on April 3, 2012. Grayson lost money in the Derivium Capital Ponzi scheme and sought damages of $28 million to $77 million on a variety of claims against Wachovia.  The arbitration panel found only that Wachovia aided and abetted breach of fiduciary duties and awarded Grayson far less than he sought.

Unfortunately, the arbitration award does not include any findings explaining why Wachovia was found liable. Nevertheless, the story can be partially pieced together. First, it is necessary to understand the Derivium scheme itself. In General Holding, Inc. v. Cathcart, 2009 U.S. Dist. LEXIS 130777 (D.S.C. July 29, 2009), in which Grayson was one of the plaintiffs, the court made these specific findings describing the scheme:

The scheme was effected through a financial operation known as the 90% Stock Loan Program (the “Program”). The Principals operated the Program primarily though Derivium Capital, LLC (“Derivium”), a South Carolina entity which they owned and controlled. Derivium marketed the Program through major financial publications and direct mailings to prospective borrowers (the “Borrowers”) who were solicited to pledge their publicly-traded stock to Derivium as collateral for a loan in the amount of 90% of the stock's value. Each of the Plaintiffs, other than the Trustee, was a Borrower of Derivium.

As the name implies, the Program permitted the Borrowers to borrow  up to 90% of the current value of the stock offered as collateral. Since the loan was non-recourse such that if the value of the stock decreased during the loan term, typically three years, the Borrower could surrender the stock to Derivium in satisfaction of the loan with no further obligation. Upon maturity, borrowers had the option of tendering principal and interest and demanding the return of their collateral (or the difference in cash between the stock price and the payoff amount), which the Borrower would typically elect if the stock's value had risen during the loan term.

The use the Principals made of the collateral during the loan term was concealed from the Borrowers and even from some of Derivium’s own sales force. At the Principals’ direction, Derivium’s employees told those who asked that Derivium would “hedge” their collateral in accordance with a highly confidential, complex, proprietary formula developed by Cathcart. In addition, Derivium’s employees and its marketing materials touted Cathcart and Debevc’s experience in developing derivative instruments. Through these representations, along with the company’s name itself, the Principals intended to create the impression that they would employ derivative instruments to protect the value of the collateral. In fact, the Principals sold the stock immediately upon receipt, paid themselves substantial fees in the form of commissions and used the remaining proceeds to fund their own start-up companies in the construction industry, in which the Principals had no prior experience. All but one of these start-up ventures failed. Because Derivium had sold all of the stock, maintained no capital reserves, and entered into no derivative transactions, it was unable to return Clients’ stock at maturity. Significantly, the Principals continued to solicit new clients and enter into new stock loans for years after the Principals knew the scheme would collapse.

In that case, Grayson was awarded a judgment of $34,105,670 on his claim of piercing the corporate veil against Derivium’s principals, Cathcart and Debevc.

Grayson had also filed a complaint against Wachovia, in which he specifically alleged that Derivium was a Ponzi scheme. “[T]he Derivium Owners sometimes were using funds derived from new transactions carried out in Defendants’ brokerage accounts to pay off funds owed on old transactions, the very definition of a Ponzi scheme.” See Grayson Consulting, Inc. v. Wachovia Securities, LLC (In re Derivium Capital, LLC), 2008 Bankr. LEXIS 4109 (Bankr. D.S.C. June 10, 2008). Grayson asserted claims that Wachovia aided and abetted the Derivium Owners in fraud, breach of fiduciary duty, fraudulent conveyance, and conversion.  He also claimed that Wachovia was negligent, breached a fiduciary duty owed to Debtor, converted property of Debtor, and conspired with the Derivium Owners to injure Debtor. Grayson specifically alleged how Wachovia participated in the scheme:

To carry out the stock-loan program, Debtor used brokerage accounts with Wachovia and other entities. According to the amended complaint, Wachovia, at the direction of the Derivium Owners, liquidated the pledged stock to assist the Derivium Owners in the alleged fraud against the borrowers. Grayson asserts that Wachovia knew that the Derivium Owners were depicting the transactions with Debtor as stock-loans, in which the borrowers retained an ownership interest in the pledged stock, yet Wachovia nevertheless assisted in the scheme by liquidating the borrowers’ stock.

Id. However, the court dismissed all of Grayson’s tort claims against Wachovia, which were brought by Grayson as the successor to the Debtor’s rights against Wachovia, on in pari delicto grounds.

Despite that dismissal, Grayson pursued nearly identical claims in a FINRA arbitration proceeding against Wachovia.  According to the arbitration award:

Claimants asserted the following causes of action: (1) fraud: (2) aiding and abetting fraud; (3) Uniform Securities Act fraud; (4) negligent misrepresentation; (5) aiding and abetting breach of fiduciary duty; (6) conversion; (7) civil conspiracy; (8) unfair trade practices; (9) fraudulent conveyance; (10) aiding and abetting fraudulent conveyance; and, (11) quantum meruit. The causes of action relate to an alleged "stock loan" Ponzi scheme involving Claimant Grayson's entry into "stock loan" agreements with Derivium Capital LLC and Derivium Capital (USA), Inc.

In pertinent part, the arbitration panel concluded, “Respondent is liable on the claim of aiding and abetting breach of fiduciary duty and shall pay to Claimants compensatory damages in the amount of $852,000.00, inclusive of pre-judgment interest. . . . Any and all claims for relief not specifically addressed herein, including Claimants' request for punitive damages, are denied.” As noted, this award was made with no findings whatsoever. The arbitration award is here.

On April 23, 2012, Grayson’s attorneys issued a statement, “This outcome should be a warning to brokerage firms everywhere to be mindful of what is happening inside their houses. Firms cannot give sanctuary to Ponzi schemers and then turn a blind eye to bad acts taking place in their firm. If they are in a position to know that something is wrong and allow it to happen, they could be held liable to the customers victimized.”

The message to Wachovia and other brokerages would have been much stronger if the arbitrators had actually disclosed why they held Wachovia liable.

Monday, April 16, 2012

Attorney Fees At Risk in the Aftermath of Ponzi Schemes

Posted by Kathy Bazoian Phelps

Attorneys provide legal services, bill for them, and hope to get paid. Sometimes, they even get paid. When attorney fees meet up with Ponzi schemes, however, the game changes, and attorneys face a host of additional problems relating to their fees, even if the attorneys and the services they provided were not at all involved in or related to the Ponzi scheme. Two recent decisions in Ponzi cases highlight a few of the problems that can be encountered: one in trying to collect fees from a government forfeiture proceeding, and the other in defending the attempted disgorgement of fees already paid on fraudulent transfer theories.

In United States v. Madoff, 2012 U.S. Dist. LEXIS 48733 (S.D.N.Y. Apr. 3, 2012), the firm of Epstein, Becker & Green, P.C. (“EBG”) was forced to do battle with the government in seeking payment of fees earned from settlement proceeds that turned into forfeited funds. EBG had performed legal services for Ruth Madoff that were unrelated to her husband’s Ponzi scheme. Those services resulted in settlement of a suit in her favor in the amount of $61,993. EBG’s fees for this were $24,790.86. In the meantime, however, Bernard Madoff was arrested and convicted, and the district court entered a forfeiture order against most of the Madoffs’ property, including the proceeds of Ruth’s suit.

EBG’s then took the only recourse that was available to it at that point - to submit a claim in the forfeiture action under 21 U.S.C. § 853(n). Specifically, it asserted that it held a legal interest superior to that of the government under § 853(n)(6)(A) and that it was a bona fide purchaser for value, under § 853(n)(6)(B).

The court, however, dismissed these claims, holding, “To have a claim in the specific property, a creditor, therefore, must secure a judgment or perfect a lien against a particular item.” The court further held, “To enforce a lien under the [applicable New Jersey] Act, an attorney must file an application with the court; otherwise, the attorney will lose the right to assert an attorney's lien against any proceeds derived from his services.” Because EBG had not filed such an application, it was merely a general creditor without a legal interest superior to that of the government.

The court further noted that even if EBG had a valid claim to the lawsuit proceeds, it would not have been a superior interest because of the relation back doctrine. Under that doctrine, the government’s interest in the Madoff’s property arose when his crimes were committed beginning at least as early as the 1980s, well before Ruth’s lawsuit was settled.

Finally, the court also rejected EBG’s claim that it was bona fide purchaser for value. It held that as a general creditor without a legal interest in the settlement funds, EBG had no standing to assert such a claim under § 853(n)(6)(B).

Third party claims in forfeiture actions are increasingly common, given the rise in Ponzi cases. These types of claims are extensively covered in § 16.04 of The Ponzi Book: A Legal Resource for Unraveling Ponzi Schemes.

In the second case, Silverman v. Meister Seelig & Fein, LLP (In re Agape World, LLP), 2012 Bankr. LEXIS 911 (Bankr. E.D.N.Y., Feb. 21, 2012), the law firm (“MSF”) provided legal services to Agape during a time when Agape was conducting a Ponzi scheme. It billed and collected $400,000 in fees and expenses. After his appointment as trustee in Agape’s bankruptcy, Silverman filed a lawsuit against MSF, including claims to recover the attorney fees paid on theories of actual and constructive fraudulent transfer, as well as a claim for malpractice, and many other claims.

MSF moved to dismiss the entire suit, and the court granted much of the motion on standing grounds. However, the court denied the motion as to the fraudulent transfer claims.

On the actual fraudulent transfer claim, the court held that the “Ponzi presumption” worked “to establish fraudulent intent on the part of the transferor as a matter of law.” In support of its motion, MSF asserted there was no allegation of its fraudulent intent, but the court rejected this argument, holding that MSF’s intent was irrelevant. MSF also argued that it was entitled to the good faith defense under § 548(c), but the court also rejected this defense, holding, “it is only sufficient to dismiss these claims at this stage if it appears from the face of the Complaint that the Defendant took the funds in good faith and for fair consideration.” The court found that Silverman’s complaint adequately alleged MSF’s knowledge of Agape’s wrongdoing and that Agape received less than fair value.

The court’s more notable holding was on Silverman’s constructive fraudulent transfer claim. MSF argued that as the recipient of its legal services, Agape received sufficient consideration as a matter of law. But the court rejected that argument, holding that Silverman had “adequately pleaded that the Defendant provided less than fair consideration in exchange for the [payments that it received] because the Defendant acted negligently in its representation of Agape.” At the same time, the court dismissed Silverman’s direct malpractice claim on several grounds, including lack of standing and the in pari delicto doctrine.

Therefore, under the court’s holding, even if a trustee’s malpractice claim against a Ponzi perpetrator’s attorney is barred by the in pari delicto doctrine, that same malpractice claim can be sufficient to show a lack of reasonably equivalent value on a constructive fraudulent transfer claim. This holding effectively creates a new and potentially important exception to the in pari delicto doctrine, or at least a significant narrowing of it. It will be interesting to see whether it gains traction among trustees and, more importantly, courts.

Actual and constructive fraudulent transfers and the defenses to these claims are fully covered in chapters 1, 2 and 3 of The Ponzi Book: A Legal Resource for Unraveling Ponzi Schemes.

Friday, April 13, 2012

Legislative Protection for Charities Caught by Ponzi Clawbacks

Posted by Kathy Bazoian Phelps   

On April 3, 2012, Minnesota Governor Mark Dayton signed a new law, Chapter 151, House File 1384, designed to protect nonprofits from having to pay back donations made by Ponzi perpetrators and other fraudulent sources.  The new law actually restricts a trustee’s recovery in three distinct ways.

First, it amends Minnesota Statutes § 513.41 to exempt charitable organizations from returning transfers made outside of a two year statute of limitations.  The current statute of limitation on fraudulent transfer lawsuits is six years.  The new statute effectively shortens the statute of limitations by amending the definition of a “transfer” to exclude any transfer more than two years before the commencement of the action, as follows:

“Transfer” does not include a contribution of money or an asset made to a qualified charitable or religious organization or entity unless the contribution was made within two years of commencement of an action under sections 513.41 to 513.51 against the qualified charitable or religious organization or entity and [the transfer was either an actual or a constructive fraudulent transfer].

Second, even within the two years before the action is commenced, recovery of constructive fraudulent transfers is restricted in amount according to a formula that further narrows the definition of a “transfer,” as follows:

A transfer of a charitable contribution to a qualified charitable or religious organization or entity is not considered a [constructive] transfer . . . if the amount of that contribution did not exceed 15 percent of the gross annual income of the debtor for the year in which the transfer of the contribution was made; or the contribution exceeded that amount but the transfer was consistent with practices of the debtor in making charitable contributions.
Those familiar with the Bankruptcy Code will recognize that this precise limitation applies to a trustee’s recovery under § 548(a)(2).  As a result, substantial case law is available that should assist in interpreting and applying this new Minnesota restriction.  This case law is thoroughly reviewed in § 3.02[5] of The Ponzi Book: A Legal Resource for Unraveling Ponzi Schemes, by Kathy Bazoian Phelps and Hon. Steven Rhodes.

The third way in which the new Minnesota statute restricts a trustee’s recovery is that these limits are given immediate effect and are applied to existing lawsuits, as follows:

This section is effective the day following final enactment and applies to a cause of action existing on, or arising on or after, that date.
Reactions to the new law have been as expected.  Doug Kelley, the trustee in the Thomas Petters bankruptcy case pending in Minnesota, had sued several charities, including the Minnesota Teen Challenge for $2.3 million and the College of St. Benedict for $2 million.  He has been quoted as saying that the new law could possibly bar him from collecting between $200 million and $450 million.  He also reportedly expressed concern that the law will turn Petters’ investors into two-time victims by reducing their recoveries.
On the other side, the College of St. Benedict told the Minneapolis Star Tribune that it “accepted and spent the donations in good faith from 2003 to 2006 to further its mission,” and added,  “We are gratified that a bill recently passed by the 2012 Minnesota Legislature and awaiting the governor’s signature recognizes the position of nonprofits in such situations.”

It will be interesting to whether other states follow Minnesota’s lead on this important question. The new Minnesota law is available here.

Thursday, April 12, 2012

Podcast on Bank Liability in Ponzi Schemes

Posted by Kathy Bazoian Phelps

To hear about issues relating to the liability of banks in Ponzi scheme cases, listen to my podcast - “Bankers That Bank Fraudsters Could Face Costly Liability to Victims” - presented by the Association of Certified Financial Crime Specialists, available here.  Banks have faced substantial claims in many Ponzi cases, including the Rothstein and Madoff cases, and were held liable in some actions but not in others. The podcast also includes discussion of some of the things that banks can and should be doing to protect themselves against potential liability in these cases.   

 Issues relating to bank liability in Ponzi cases and the many contexts in which such claims can arise are discussed in The Ponzi Book: A Legal Resource for Unraveling Ponzi Schemes by Kathy Bazoian Phelps and Hon. Steven Rhodes.

Monday, April 9, 2012

The "In Pari Delicto" Battle in Ponzi Cases Rages On

Posted by Kathy Bazoian Phelps

Although the Seventh Circuit recently vacated the dismissal of the trustee’s claim for negligence against an accounting firm, that court did not do the trustee any favors. In fact, the language in Peterson v. McGladrey & Pullen, 2012 U.S. App. LEXIS 6608 (7th Cir. April 3, 2012), is solidly against excusing a trustee from the in pari delicto doctrine. It is a backhanded slap against all trustees seeking to recover funds for the benefit of creditors of their estates where the debtor was a crook. The dismissal of the trustee’s claims was vacated, but the Seventh Circuit made clear that this was not because the in pari delicto doctrine did not apply to the trustee. The Seventh Circuit joined many other circuits in holding that a trustee’s claims are subject to the in pari delicto defense, even though a trustee acts for the benefit of the defrauded victims and not the wrongdoer.

The trustee in Peterson v. McGladrey & Pullen, joined by an amicus brief filed by the National Association of Bankruptcy Trustees, sought a ruling that the trustee is not barred by the in pari delicto doctrine. The Seventh Circuit restated the trustee’s position and summarily dismissed it as follows:

Section 541(a) provides that an estate in bankruptcy includes all of the debtor's "property", a word that comprises legal claims such as the one against McGladrey. "Property" normally is defined by state law--and in Illinois a claim for damages is limited by defenses such as in pari delicto. The Trustee and the Association want us to hold that a bankruptcy estate includes rights of recovery, stripped of their defenses. If in pari delicto is out, presumably the statute of limitations would be out too, or maybe even the defense of accord and satisfaction. As the Trustee and the Association see things, "public policy" favors greater recoveries for estates in bankruptcy, so that more money is available for distribution and so that wrongdoing by a corporation's "gatekeepers" (the accountants as well as Bell) may be deterred more effectively.
Neither the Trustee nor the Association identifies any provision of the Code that overrides state-law limits on the legal claims created by state law against the debtor's auditors. "Public policy" is not a ground on which the federal judiciary may create such a limit--not unless the Supreme Court first overrules Butner, Raleigh, and similar decisions. We therefore agree with the conclusion of every other court of appeals that has addressed this subject and hold that a person sued by a trustee in bankruptcy may assert the defense of in pari delicto, if the jurisdiction whose law creates the claim permits such a defense outside of bankruptcy.
The court remanded the action to the district court to determine whether the debtors’ principal knew of the Ponzi scheme during the time that the defendant auditor allegedly committed malpractice.
The debate over whether the in pari delicto doctrine should apply to an innocent trustee acting for the benefit of defrauded investors in a Ponzi scheme arises frequently in these cases. In my blog posted on February 22, 2012, I discussed the issues as they arose in the Madoff case when Irving Picard’s claims against JP Morgan and other banks were dismissed on these grounds, among others. JP Morgan just filed its brief in opposition to Irving Picard’s appeal to the Second Circuit asking the Second Circuit to affirm the lower court’s ruling that Picard’s claims are barred by the doctrine of in pari delicto, among other things. A copy of JP Morgan’s brief is available here.
On the issue of in pari delicto, JP Morgan relies heavily on the Wagoner Rule in the Second Circuit in asking the court to affirm the lower court’s ruling dismissing Picard’s claims. JP Morgan argues in its opposition:
Under this doctrine - known as theWagoner rule” - “when a bankrupt corporation has joined with a third party in defrauding its creditors, the trustee cannot recover against the third party for the damage to the creditors.” Id. at 118; accord Kirschner v. Grant Thornton LLP, 2009 WL 1286326, at *10 (S.D.N.Y. Apr. 14, 2009) (Lynch, J.), aff’d, 626 F.3d 673 (2d Cir. 2010) (applying Wagoner rule to dismiss fraud and breach of fiduciary claims where the debtor “participated in, and benefitted from, the very wrong for which it seeks to recover”); Breeden v. Kirkpatrick & Lockhart LLP (In re Bennett Funding Grp., Inc.), 336 F.3d 94, 99- 100 (2d Cir. 2003) (applying Wagoner rule to prevent trustee for Ponzi scheme operator from bringing malpractice claims); Hirsch, 72 F.3d at 1094-95 (same).

The Wagoner rule is related to the state-law doctrine of in pari delicto. The rule “derives from the fundamental principle of agency that the misconduct of managers within the scope of their employment will normally be imputed to the corporation.” Wight v. BankAmerica Corp., 219 F.3d 79, 86-87 (2d Cir. 2000). “[B]ecause a trustee stands in the shoes of the corporation, the Wagoner rule bars a trustee from suing to recover for a wrong that he himself essentially took part in.” Id. at 87; see also Kirschner v. KPMG LLP, 15 N.Y.3d Case: 11-5044 Document: 110 Page: 35 04/05/2012 572673 91 -23- 446, 464 (2010) (“The doctrine of in pari delicto mandates that the courts will not intercede to resolve a dispute between two wrongdoers.”).

In this case, the Wagoner rule and the doctrine of in pari delicto plainly prevent the Trustee from bringing claims as successor to BMIS.

The Ponzi Book: A Legal Resource for Unraveling Ponzi Schemes dedicates an entire chapter to the subject of in pari delicto, which is an important defense to block multi-million and multi-billion dollar claims in Ponzi cases.

Wednesday, April 4, 2012

Ponzi Victims Pitted Against Each Other: Madoff Trustee v. California Attorney General

Posted by Kathy Bazoian Phelps

“An under-appreciated evil of substantial frauds . . . is how they pit their victims against one another.”  United States v. Dreier, 682 F. Supp. 2d 417, 418 (S.D.N.Y. 2010).

In the typical Ponzi case, some victims may employ strategies to seek advantage over other victims. These may include asserting: (1) equitable claims such as constructive trust to take the entirety of an asset rather than a pro rata share; (2) restitution claims in forfeiture proceedings; (3) a variety of legal claims to recover damages on theories such as breach of fiduciary duty or aiding and abetting against insiders and professionals; (4) the good faith defense to clawback suits in an effort to hold on to money already paid; and (5) in equity receivership actions, a more advantageous distribution scheme to one category of creditors over another.

Now, however, the Attorney General of California, Kamala D. Harris, has found a new and creative way to seek an advantage for some of Madoff’s victims. Not surprisingly, the victims for whom she seeks an advantage are her constituents in California. She filed a civil enforcement action against Stanley Chais and his probate estate in the California Superior Court in Los Angeles, seeking restitution and damages of $270 million. Chais ran a major feeder fund for Madoff which she contends violated state securities laws. Her amended complaint is available here.

At the same time, for the benefit of Madoff’s customers, Irving Picard, the trustee of Bernard L. Madoff Investment Securities, LLC, has a clawback suit against the estate of Chais pending in the bankruptcy court in New York. Picard contends that Chais acquired all of his assets through fraudulent transfers from Madoff. Picard’s complaint against the Chais defendants is here.

And so Harris and Picard are competing for the same assets – Chais’s assets – and it’s hundreds of millions of dollars. Who will win?

This high-stakes issue is squarely presented to the bankruptcy court in New York in a suit that Picard recently filed against Harris. Picard contends that Harris’s suit in Los Angeles violates the automatic stay of bankruptcy, and he has requested a preliminary injunction to enforce the stay. Harris has filed a forceful opposition. As of this writing, the motion has not yet been set for hearing. Picard’s complaint against Harris is here and his motion for a preliminary injunction is here. Harris’s opposition is here.

Picard’s brief in support of his motion for a preliminary injunction argues:

· The bankruptcy court in New York has subject matter jurisdiction over Harris’s claim.
· Because of the nature of Picard’s requested relief to preserve and protect property of the Madoff estate, Harris cannot raise a sovereign immunity defense and the court can enter an injunction against her action.
· Her action violates the stay of 11 U.S.C. § 362(a).
· Her action is a disguised fraudulent transfer action that violates § 362(a)(1).
· Her action seeks to obtain customer property in violation of § 362(a)(3).
· Her action is not excepted from the automatic stay by the police and regulatory power exception in § 362(b)(4).
· Her action seeks to recover on the trustee’s claim in violation of § 362(a)(6).
· The court should stay the Harris’s action under § 105 to allow for the fair and equitable administration of the bankruptcy estate.
· The injunction would avoid unnecessary proceedings because if Harris were to prevail in her action, the trustee will in any event pursue any transfers of customer property from the Chais defendants to the subsequent transferees.

In her brief in opposition, Harris argues:

· The automatic stay does not apply to an enforcement action against a non-debtor like Chais.
· Her enforcement action does not seek to recover a claim against the debtor and thus is not barred by § 362(a)(1) or (6).
· Her action does not seek or seek to control property of the estate or customer property and thus is not barred by § 362(a)(3).
· There is no justification to extend the stay under § 105.
· Her action is excepted from the stay by § 362(b)(4), the police and regulatory power exception.
· Because of that exception, the trustee is not entitled to a stay under § 105.

The tough question that Picard will have to answer is why he should be permitted to block the victims of Chais’s fraud from collecting against his probate estate while at the same time refusing under SIPA to recognize the claims of those very victims who invested, not directly with Madoff, but instead in feeder funds like that of Chais. Picard previously argued, and the bankruptcy and district courts held, that investors in Madoff’s feeder funds do not qualify as “customers” under SIPA. SIPC v. Bernard L. Madoff Investment Securities, LLC, 454 B.R. 285 (Bankr. S.D.N.Y. 2011), aff’d sub nom. Aozora Bank Ltd. v. SIPC, 2011 U.S. Dist. LEXIS 150753 (S.D.N.Y. Jan. 4, 2012).

The tough questions that Harris will have to answer are the slippery slope questions: If a state enacts a law making failure to pay a debt illegal, with enforcement by the state’s attorney general, would § 362(b)(4) except such an “enforcement” action from the automatic stay? And if that action is not excepted from the stay because it is only an attempt to collect a debt, how is her present enforcement action any different?  Also, what if every state attorney general filed a similar action against Chais’s probate estate?

This litigation is immensely important to Madoff’s victims because of its potential impact on how Chais’s assets will be distributed. We will watch it closely and continue to report on it for you. In The Ponzi Book: A Legal Resource for Unraveling Ponzi Schemes, automatic stay issues are addressed in §§13.02[2][f] and 20.06[5] and issues of competing victims’ claims are addressed in § 16.07.

Sunday, April 1, 2012

A Treasure Trove of Ponzi Pleadings

Posted by Kathy Bazoian Phelps

Access to sample complaints asserting relevant claims and briefs asserting cogent legal arguments would be a dream come true when handling a complex fraud case, especially a Ponzi case. Remarkably, many such samples are readily available on the internet.  These pleadings are real-life examples of filings in some of the biggest and most complex Ponzi cases ever.

While writing The Ponzi Book: A Legal Resource for Unraveling Ponzi Schemes, we compiled a list of all of the websites that we could locate on pending and recent Ponzi cases. Trustees and receivers have established these sites to keep investors and others advised of the status of their cases, and they post all relevant complaints, motions, and other pleadings on a current basis. These websites provide valuable access to their legal theories and the arguments raised in response. 

Whether you are looking for forms of pleadings to assist you in your own Ponzi case, or for briefs on issues that you are facing, or for information that you need regarding an existing Ponzi case, this information can be found in the websites of these infamous Ponzi cases.  Rather than trolling the dockets of individual cases in bankruptcy or district courts, you can access all of the links to these websites on one page for your convenience.  Check it out at:

Also, please let me know if you are aware of any other trustee or receiver websites in Ponzi cases that should be added to the list.