Article

• Jurisdiction: United States,Federal
• Citation: Vol. 27 No. 1 Pg. 11
• Pages: 11
• Publication year: 2014

Article Vol. 27 No. 1 Pg. 11 Utah Bar Journal February, 2014

January, 2014

INNOCENCE LOST: FRAUDULENT TRANSFER ACTIONS AGAINST INNOCENT INVESTORS OF A PONZI SCHEME

Jared N. Parrish.

The term "innocent" does not necessarily mean "free from liability." This is particularly true when discussing the liability of an innocent investor in the aftermath of a Ponzi scheme, who may be subject to disgorgement of investment profits to an equity receiver.

The market crash and subsequent Great Recession of the last decade brought to light a number of massive financial fraud operations masquerading as legitimate business opportunities, exposing them as Ponzi schemes. Whether cloaked by the veil of a real estate opportunity or a proprietary investment algorithm, many of these schemes collapsed when infusions of new investment capital dried up.

After the collapse of a large Ponzi scheme, federal regulatory agencies often seek appointment of an equity receiver to take control of the company and cease ongoing fraudulent activity. A receivership is a court-established custodial proceeding in which the court oversees and directs a receiver in the administration of an estate created principally for the benefit of creditors. An equity receivership is established when a regulatory agency files a civil enforcement action against a company, and its principals, suspected of fraud or other wrongdoing. As part of the enforcement action, the agency files for an ex-parte temporary restraining order and appointment of a receiver. If the court grants the motion, a receiver is appointed and given powers and duties defined in the order. The receiver's authority flows from, and is governed by, the appointment order.

The Sixth Circuit explained,

The receiver's role, and the district court's purpose in the appointment, is to safeguard the disputed assets, administer the property as suitable, and to assist the district court in achieving a final, equitable distribution of the assets if necessary. As an officer of the court, the receiver's powers are coextensive with his order of appointment.

Liberie Capital Grp., LLC v. Capwill, 462 F.3d 543, 551 (6th Cir. 2006).

Receivership orders typically direct a receiver to conduct an investigation into the affairs of the company subject to the order and to marshal the company's assets. This task generally includes filing lawsuits to recover fraudulent transfers.

Many receivers file lawsuits against insiders and those who...