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Ponzi schemes are increasingly in the news. Recently, the FBI released information about an $18 million Ponzi scheme based out of Nashville, Tenn., in which three men involved in the Hanover Corp. pled guilty to securities fraud, money laundering and conspiracy.[1] In that scheme, the three men offered clients the opportunity to invest in Hanover through promissory notes bearing high interest rates. In this classic Ponzi scheme, Hanover promised that the money would be invested in stock options and startup companies.
Since the enactment of the Fraudulent Conveyances Act of 1571, the law has prohibited transfers designed to hinder, delay, or defraud creditors.[1] Likewise, aiding-and-abetting and conspiracy are well-established bases for civil liability. Business lawyers live and breathe these concepts.
In a bankruptcy context, issues arising from the forced transfer of partnership or membership interests in a closely held business are a frequently encountered by the practitioner. The relevant focus is upon the value, or lack of value, given in consideration for the transfer of interest. The terms of the instant agreement or applicable state statutes will be the key to unlocking the value given in exchange for the interest with reference to avoidance by the estate.
The unfortunate aftermath of a Ponzi scheme is that it leaves investors fighting amongst themselves over what remains and the competing interests of the “net losers” (those who lost money beyond the initial investment) trying to recover some of their losses and the “net winners” (those who made a profit) trying to hold onto distributions they received.
In Labourers’ Pension Fund of Central and Eastern Canada v. Sino-Forest Corporation[1], the Ontario court[2] approved Ernst & Young LLP’s (“Ernst & Young”) $117 million settlement relating to class action lawsuits commenced by jilted investors following the downfall of Sino-Forest Corporation (“SFC”), once the most valuable forestry company on the Toronto Stock Exchange. The $9.2 Billion class action (which is ongoing against certain defendants) contains significant allegations of fraud that call into question SFC's reported asset values and revenues, as well as the practices of SFC's auditors, underwriters and consultants.
Recently, the Bankruptcy Court for the District of Massachusetts ruled in In re Duplication Management, Inc., (Riley v. Countrywide)[1] that courts can shift the burden of production[2] to a defendant to quantify the value of indirect benefits purportedly received by a debtor accused of making a fraudulent transfer.[3] Duplication Management is notable not only in shedding light on what is meant by the “burden of production,” but also under what circumstances this burden might shift to a defendant.
Lawyers typically stand in awe of courts’ “inherent power” – we understand that compliance with courts’ whims as well as their directives, and unambiguous candor, are essential if we are to escape the broad range of sanctions that courts have at their disposal. In Law v.
