Even though unaware that his boss was conducting a fraud, the executive assistant to a Ponzi-schemer was obliged to return the compensation he received as a fraudulent transfer, according to Chief District Judge Robert J. Shelby of Salt Lake City.
An individual was conducting an audacious Ponzi scheme. He promised annual returns of at least 100% to investors based on his asserted facility in day-trading Apple stock. He took in $27.3 million from investors but invested only $14 million in stock: He lost $3.5 million in trading and spent $6.7 million on himself and his family, according to the January 4 opinion by Judge Shelby.
After about four years, the Securities and Exchange Commission uncovered the fraud, brought a civil action, and obtained the appointment of a receiver. The investors had lost about $15 million.
Ultimately, the fraudster was convicted of criminal charges in state court and sentenced to four years imprisonment. He also was ordered to pay more than $21 million in restitution. The federal court permanently enjoined him from violating securities laws and ordered the disgorgement of almost $14 million.
The receiver sued the fraudster’s executive assistant under the Utah Fraudulent Transfer Act for receipt of some $460,000 in compensation and other payments. The receiver filed a motion for summary judgment, supported by an expert’s report stating that the fraudster was operating a Ponzi scheme.
The outcome of the motion turned on two issues, Judge Shelby said: (1) Was the enterprise a Ponzi scheme; and (2) did the defendant give reasonably equivalent value while receiving the payments in good faith?
Judge Shelby ruled that the enterprise was a Ponzi scheme, based on several factors. Prominently, the business was insolvent after the second month of operation, never generated sufficient profits to pay investors, was unable to pay debts as they came due, and “remained afloat only by relying on cash infusions from new investors.”
The existence of a Ponzi scheme gave rise to the so-called Ponzi scheme presumption. Judge Shelby explained that the finding creates a presumption that all of the transfers to the defendant were fraudulent. The receiver would be entitled to judgment unless the defendant could establish an affirmative defense that he received the transfers in good faith and for reasonably equivalent value.
The defendant first argued that the presumption only applies to investors in Ponzi schemes, not to employees. Judge Shelby said that the “UFTA does not distinguish between investors and non-investors.” He said that the executive assistant was not akin to a utility provider.
Rather, Judge Shelby said that the defendant was an inside employee “intimately involved with the . . . day-to-day operations” and aided the fraudster in “perpetuating [the] fraudulent scheme.” He refused to “undermine the UFTA by declining to apply the Ponzi presumption to the payments . . . simply because” the defendant was not among the “investors in the scheme.”
On the second issue of good faith and reasonably equivalent value, the receiver did not contend that the executive assistant had knowledge of the fraud. Instead, the receiver argued there was no reasonably equivalent value because the defendant helped perpetuate the fraud. Judge Shelby agreed.
Even if the defendant was in good faith and had no intent to assist in the fraud, Judge Shelby said that the services by the executive assistant “were central to convincing new and current investors [that it] was a profitable venture — thereby encouraging them to invest more money into the scheme.”
Judge Shelby decided that the fraudster had hired the defendant to give the business a “veneer of legitimacy.” He granted the receiver’s motion for summary judgment because the defendant was “in utter complicity” with the fraud, “even if [the defendant] did not intend to promote it.”
Even though unaware that his boss was conducting a fraud, the executive assistant to a Ponzi-schemer was obliged to return the compensation he received as a fraudulent transfer, according to Chief District Judge Robert J. Shelby of Salt Lake City.
An individual was conducting an audacious Ponzi scheme. He promised annual returns of at least 100% to investors based on his asserted facility in day-trading Apple stock. He took in $27.3 million from investors but invested only $14 million in stock: He lost $3.5 million in trading and spent $6.7 million on himself and his family, according to the January 4 opinion by Judge Shelby.
After about four years, the Securities and Exchange Commission uncovered the fraud, brought a civil action, and obtained the appointment of a receiver. The investors had lost about $15 million.
Ultimately, the fraudster was convicted of criminal charges in state court and sentenced to four years imprisonment. He also was ordered to pay more than $21 million in restitution. The federal court permanently enjoined him from violating securities laws and ordered the disgorgement of almost $14 million.