Ponzi Schemes and Poker-is Recovering Gambling Losses a Winning Hand?

• Publication year: 2014
• Author: Corey R. Weber and Steven T. Gubner

Ponzi Schemes and Poker-Is Recovering Gambling Losses a Winning Hand?

Corey R. Weber and Steven T. Gubner

Corey R. Weber, a partner at Ezra Brutzkus Gubner LLP, is a litigator in bankruptcy, business and commercial litigation. He is the Co-Vice Chair of the Insolvency Law Committee (a standing committee of the Business Law Section of the State Bar of California) for 2014-2015. Corey represents parties in adversary proceedings in bankruptcy cases, and frequently litigates complex fraudulent transfer cases involving Ponzi schemes, fraud and breaches of fiduciary duty.

Steve Gubner, Managing Partner of Ezra Brutzkus Gubner LLP, represents financial institutions, Fortune 500 companies (and their financing divisions), closely held businesses and high net worth individuals in complex bankruptcy and insolvency matters. His strengths include management of the sensitive issues surrounding involuntary bankruptcy filings and application of general business advice to assist clients in navigating potential pitfalls and to solve problems before they occur.

Aprominent manager of a Beverly Hills hedge fund had allegedly lost millions of dollars to celebrities, prominent Hollywood powerbrokers and wealthy businessmen in high-stakes poker games and a bankruptcy trustee had filed suits to recover the gambling losses. We were taking a deposition in Chicago when the story broke. Calls and e-mails started pouring in from Good Morning America, USA Today, and virtually every other major news outlet. Our firm represented the bankruptcy trustee, Howard Ehrenberg,¹ who had filed the lawsuits demanding that the poker players return the money that they had allegedly won in those high-stakes games from Bradley Ruderman; Ruderman was the principal of Ruderman Capital Partners, LLC, a small Beverly Hills hedge fund. In 2009, creditors filed an involuntary bankruptcy petition as to Ruderman Capital Partners. Ruderman turned himself in to the United States Attorney's Office around the same time and pled guilty to, among other things, operating Ruderman Capital Partners as a Ponzi scheme.

The story captured the spotlight in both tabloids and major media outlets. A story in The Hollywood Reporter titled The Secret World of Hollywood Poker described that "the fish had bluffed the sharks. He was not one of them. And thanks to Ruderman, details of the secretive poker game have come to light in public documents filed by the court-appointed trustee overseeing the bankruptcy of Ruderman's failed firm."² As a testament to the staying power of the story, on June 24, 2014, the person who allegedly organized the poker games published a "tell-all" book titled Molly's Game: High Stakes, Hollywood's Elite, Hotshot Bankers, My Life in the World of Underground Poker.

The lawsuits, known as adversary proceedings, filed in the Ruderman Capital Partners bankruptcy case to recover the poker losses are called avoidance actions (to avoid and recover pre-bankruptcy transfers of money or property) or clawback actions (to claw back the transfers). The claims sought to avoid and recover fraudulent transfers pursuant to both the Bankruptcy Code and the Uniform Fraudulent Transfers Act codified in the California Civil Code.

Avoidance actions or clawback actions are generally intended to equalize distributions to creditors by a bankruptcy estate so that those creditors that receive pre-bankruptcy payments receive the same percentage distribution as those that do not receive the payments. In addition, avoidance actions are to recover transfers that the debtor should not have made, whether due to intent to defraud creditors, or due to the debtor's insolvency or inability to pay debts as they become due when the transfer was not made for fair consideration. Transferees, including poker players and casinos, sued in fraudulent transfer actions have the ability to overcome the trustee's prima facie case by proving that they acted in good faith and provided value. See 11 U.S.C. § 548(c). Trustees rarely pursue avoidance actions against casinos, or poker players at casinos, because casinos, and poker games played there, are protected by fairly solid defenses under the case law.

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Gambling losses in games at hotels, homes and other non-state regulated locations in California present the intriguing issue, in asserting defenses, of whether providing the opportunity to win money at poker games constitutes "value" to a debtor, and whether poker players participating in the games can take winnings in "good faith," all within the meaning of § 548(c) and the California Uniform Fraudulent Transfers Act.

This article explores the prima facie case for bankruptcy trustees in fraudulent transfer actions to avoid and recover gambling losses, and the legal questions of whether value is provided through the opportunity to win money through gambling, both in state-regulated casinos and in other venues such as "home" poker games at houses or in hotels. The article also examines how a "rake"—where a person collects a percentage or set amount of the buy-in or hands in order to act as the "house" in the games and is effectively a commission or profit from operating the game—impacts the defenses that may be presented.

The First Cards Are Dealt (the "Flop")-Bankruptcy Trustees' Prima Facie Case

When the first cards of a hand are dealt, it is known as the flop. In fraudulent transfer actions, the flop is the filing of a complaint. The trustee must thereafter prove his prima facie case. Where there is a guilty plea by the principal in a Ponzi scheme case that includes admitting to running the debtor company as a Ponzi scheme, and where funds were transferred out of the debtor company³for an improper purpose (such as for gambling of investor funds), the prima facie case is not complicated to prove.

Whether under the Bankruptcy Code or the California Uniform Fraudulent Transfers Act (CUFTA), the prima facie elements of a claim for fraudulent transfer of gambling losses based on actual intent consists of proving: (1) a debtor transferred money in a game (through cancelled checks...