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Recent SEC Releases

The 'Ponzi Scheme Presumption' Is Dead. Long Live The 'Ponzi Scheme Presumption' 

By now, many who follow this site are likely aware of the Minnesota Supreme Court's recent ruling that denied a receiver's efforts to recover assets paid out to an investor on the basis that Minnesota's Uniform Fraudulent Transfer Act ("MUFTA") "does not contain a Ponzi-scheme presumption."  The ruling, which stands alone in contrast to significant state and federal jurisprudence explicitly recognizing a Ponzi scheme presumption, has spawned a growing chorus touting a new "balance of power" in clawback litigation.  However, a closer examination of the case at the middle of this controversy, as well as a primer on the application of fraudulent transfer precedent, demonstrates that this purported seismic shift in the fraudulent transfer landscape is likely nothing more than an isolated blip that will have little effect on a receiver's ability to claw back profits in a Ponzi scheme.


The case at issue involved a clawback lawsuit brought by the court-appointed receiver of First United Funding, LLC ("First United"), which sold "participation interests" in loans it had made to third parties who were to receive a sizeable profit in the form of interest repaid on the loan.  Corey Johnston, who owned and operated First United, is currently serving a six-year prison sentence after pleading guilty to bank fraud and filing a false income tax return.  While some of First United's loans were legitimate in that no more than 100% of the loan was sold via a participation interest to one or more financial institutions, First United caused multiple loans to be oversold to multiple parties - meaning that those investors would not receive legitimate proceeds but rather the redistribution of money provided by other investors - a classic hallmark of a Ponzi scheme. 

In this instance, the receiver sought to recover several million dollars paid to several financial institutions as principal and interest on a $3.18 million loan made to an Arizona businessman.  While the lower court dismissed claims against several of the banks based on the statute of limitations, it entered judgment in favor of the receiver and against Alliance Bank in the amount of $1,235,388 - an amount which appears to be the profits received by Alliance Bank on its "participation interest."  In rendering judgment in favor of the receiver, the lower court referenced the 'Ponzi scheme presumption," which that court characterized as a rule holding that “the profits that good-faith investors enjoy in connection with a Ponzi scheme are recoverable as fraudulent transfers.”

In analyzing the relevant loan in which Alliance Bank and others purchased "participation interests," the Minnesota Supreme Court focused on the statutory interpretation of MUFTA in concluding that

MUFTA does not contain a provision allowing a court to presume anything based on the mere existence of a Ponzi scheme. 

Instead, the Court observed that "MUFTA requires a creditor to prove the elements of a fraudulent transfer with respect to each transfer, rather than relying on a presumption related to the form or structure of the entity making the transfer."  Concluding that it was required to examine the transfer on a case-by-case basis, the Court found that the subject loan was not subject to the presumption nor had the receiver satisfied MUFTA's provisions as the loan was real, was not oversold, and was attacked solely on the basis that it was part of a greater Ponzi scheme. 

The Ponzi Scheme Presumption

The Uniform Fraudulent Transfer Act, which has been adopted by a majority of states including Minnesota, allows a creditor to recover a fraudulent transfer made by the debtor upon the demonstration of an actual or constructive intent to hinder, delay, or defraud the debtor's creditors.  A significant number of courts have found that the showing of the existence of a Ponzi scheme allows the court to presume that, due to the inherently fraudulent nature of a Ponzi scheme, all transactions were made with the intent to hinder, delay, or defraud a debtor's creditors.  See, generally, Perkins v. Haines, 661 F.3d 623 (11th Cir. 2011); Donell v. Kowell, 533 F.3d 762 (9th Cir. 2008).  A basic prerequisite for applying this 'Ponzi scheme presumption' involves a showing that the contested transfer was effected 'in furtherance' of the Ponzi scheme. Bear, Stearns Secs. Corp. v. Gredd (In re Manhattan Inv. Fund Ltd., 397 B.R. 1, 13 (S.D.N.Y. 2007).

In a nod to the difficulty of establishing a debtor's actual intent to hinder, delay, or defraud, state fraudulent transfer laws also allow the use of circumstantial evidence to demonstrate actual fraudulent intent through a non-exclusive list of eleven "badges of fraud."  These factors include, but are not limited to, that the transfer was concealed, the debtor removed or concealed assets, or that the transfer occurred shortly before or after a substantial debt was incurred.  Courts routinely recognize that a showing of multiple badges of fraud results in a presumption of fraudulent intent and a burden shift to the transferee to demonstrate a legitimate purpose for the transfers.

An Analysis Of Alliance Bank

A closer look into the Alliance Bank decision shows that the case involved a relatively unique factual situation that is likely to bear little precedential value going forward.  There, the court found (and the receiver did not argue) that the loan at issue was in fact real, not oversold, and was being attacked simply because it was part of a larger Ponzi scheme.  As referenced above, many courts refuse to invoke the Ponzi scheme presumption where the subject transfer was not made "in furtherance" of a Ponzi scheme.  While other relevant details remain unknown, such as the flow of the payments and whether funds used to pay Alliance Bank were commingled with other investor funds, the court concluded that the facts and circumstances known to it could not justify a showing of fraudulent intent. 

The factual backdrop of the First United Ponzi scheme is also illustrative of its uniqueness.  Unlike a majority of other Ponzi schemes, which solicit investors based on a promise that their collective funds will somehow be used to generate massive returns that they will later share, the First United Ponzi scheme essentially allocated participation in the scheme through the sale of "participation interests" in specific loans.  While some of those loans were fraudulent and used to further the Ponzi scheme, some were apparently legitimate.  In the Alliance Bank case, the financial institutions collectively purchased a 100% interest in the subject loan that entitled them to share in and resulting profits based on the loan's performance.  Thus, rather than a dollar-based investment in the schemer's hedge fund, company, or venture, an investment in First United was specifically tied to a distinguishable and distinct loan. As the court found, the loan's legitimacy and the fact that the proceeds from the loan were used to pay the returns were a critical factor in the court's ruling.

Decision's Precedential Effect Is Unlikely

While many are quick to hail the Alliance Bankdecision as a seismic shift in Ponzi scheme litigation, the reality is that the decision is likely to have little or no effect on future cases.  Indeed, while the Ponzi scheme presumption is often used to demonstrate actual intent as required to support a fraudulent transfer claim, it is not the sole avenue afforded to creditors.  Rather, state fraudulent transfer laws also allow a creditor to show actual intent by establishing the existence of badges of fraud.  It is likely that cases involving Ponzi schemes will likely feature a plethora of badges of fraud that can easily satisfy actual intent in the absence of a 'Ponzi scheme presumption.' 

This conviction is shared by Douglas Kelley, the court-appointed bankruptcy trustee tasked with recovering assets for victims of Thomas Petters' $3.65 billion Ponzi scheme, who dismissed the effect of the Alliance Bank decision in a recent interview with the Minneapolis Star Tribune, remarking:

Whether I prove the Ponzi presumtion or use badges of fraud, I can easily prove fraudulent intent.  We have no dearth of direct evidence of fraud in this case.

It is also worth noting that, even assuming the inability to invoke a 'Ponzi scheme presumption,' what further showing of fraud is necessary for an inherently deceptive scheme that by its nature depends on sustained and continuing fraud to perpetuate the scheme?  Whereas various factors can be used to establish "badges" of fraud, the showing that a debtor is operating a Ponzi scheme is itself indicative of fraud.  In other words, while the Minnesota Supreme Court recognized that the operation of a Ponzi scheme was not itself a badge of fraud, the showing that a debtor masterminded a Ponzi scheme is due to be afforded significant weight in determining the existence of the actual intent to hinder, delay, or defraud.

A copy of the Minnesota Supreme Court's decision is below: 

AppellateOpinion (1)




"Virtual Concierge" Ponzi Defendant Convicted By Jury

A south Florida man was convicted by a federal jury for his role in a "virtual concierge" Ponzi scheme that duped hundreds of investors out of tens of millions of dollars.  A federal jury deliberated for three hours before convicting Craig Hipp, 54, of wire fraud, mail fraud, and conspiracy to commit mail and wire fraud. The trial of Hipp - who was described as a minor player in the scheme - was viewed as a bellwether for the upcoming trials against Joseph Signore, Laura Grande-Signore, and Paul Schumack, who authorities have alleged played a key role in the alleged virtual concierge Ponzi scheme.  Under federal sentencing guidelines, Hipp could face at least 12.5 years in federal prison.

According to authorities, Signore and Paul Schumack solicited potential investors to participate in JCS Enterprises' ("JCS") Virtual Concierge program, which involved the purchase of a virtual concierge machines ("VCM") through a one-time fee ranging from $2,600 to $4,500 per VCM.  The VCM, which resembles an ATM, is a free-standing or wall-mounted machine placed in various businesses that purportedly allowed the advertisement of products or services and even the ability to print tickets or coupons.  Potential investors were told that the VCMs generated substantial returns, which in turn were used to pay annual returns to investors ranging from 80% to 120%. In addition, investors were provided with the location of the VCMs they had purportedly purchased, and even given the ability to track the VCM activity online.

Investors were solicited in several ways, including several websites controlled by the entities and through videos posted on popular video-sharing website YouTube.  The videos promised that the VCM would "generate income for years," and promised that a $3,500 investment could produce "huge returns."  Potential investors also received emails from Schumack, who touted his graduation from West Point Military Academy in 1979 and whose email signature also featured a Bible passage intended to create a false sense of security for investors.  

However, authorities allege that the outsized returns touted by the defendants were the result of a Ponzi scheme.  According to the SEC, the production of VCMs was not close to the amount of VCMs purportedly sold to investors, and the guaranteed returns were "a farce."  Instead, investor funds were commingled and used for a variety of unauthorized purposes, including the unauthorized transfer of more than $2 million to Signore and his family.  An additional $56,000 in investor funds were used for expenses including restaurants, stores, and a tanning salon.  Finally, approximately $4 million in investor funds were transferred to an unrelated account from which Schumack and others allegedly made more than 100 cash withdrawals of nearly $5 million. 

During the trial, Hipp's defense team sought to portray him as a devoted employee who was unaware of the fraud.  Hipp's lawyers highlighted his 11th grade education and previous employment as a carpenter, painting him as a low-level employee who was fascinated by Signore's larger-than-life persona and willing to believe Signore's claims that billionaire Carlos Slim was about to buy the business for $500 million.  As his lawyers argued, Hipp was the personification of a "fall guy" who was "duped like all the others."  

In addition to the criminal charges, authorities are also seeking forfeiture of the Signores' and Schumack's real and personal property - including their homes.  

A copy of the indictment is below:

May Indict


Golf Channel Must Repay Nearly $6M In TV Ad Money To Stanford Receiver, Says Appeals Court

A federal appeals court has ordered The Golf Channel to repay nearly $6 million it received as payment for TV advertisement services from convicted Ponzi schemer Allen Stanford, finding that the advertisement services provided no value to Stanford's victims and thus could not defeat a court-appointed receiver's fraudulent transfer claim.  While the lower court had likened The Golf Channel ("TGC") to an "innocent trade creditor" and dismissed claims bought by the court-appointed receiver, the U.S. Court of Appeals for the Fifth Circuit ("5th Circuit") found that TGC had failed to demonstrate that the TV ad package provided value to Stanford's victims and thus was subject to recovery.  The decision is likely to affect several other similar suits brought by the receiver seeking an additional $36 million in sports marketing payments.

Stanford operated Stanford International Bank, Limited ("SIB") and numerous other related entities, which pitched certificates of deposits carrying above-average rates of return to investors around the globe.  Stanford employed brokers to solicit investors for the CDs, ultimately raising more than $7 billion before the scheme collapsed in 2009.  Stanford was arrested and charged with operating a massive Ponzi scheme. A federal jury later convicted Stanford of multiple fraud charges, and he is currently serving a 110-year prison sentence (currently under appeal).

One of the ways Stanford sought to expand his scheme was through soliciting affluent investors through advertisements in prominent sporting events.  One of these events was an annual PGA Tour event held in Memphis, Tennessee which, after Stanford's title sponsorship, would become known as the Stanford St. Jude's Championship (the "Tournament").  TGC, which had broadcast rights to the Tournament, contacted Stanford in 2006 to discuss whether he would be interested in purchasing an advertising package to enhance his advertising efforts.  Later in 2006, Stanford entered into a two-year agreement with TGC that included a panoply of advertising services including commercial airtime, live coverage of the Tournament featuring messages touting Stanford's charitable contributions and products, display of the Stanford logo, and promotion of Stanford throughout the network.  Over the course of this relationship with TGC, Stanford paid approximately $5.9 million for these advertising services.

The court-appointed receiver for SIB, Ralph Janvey, sued TGC in 2011, alleging that the $5.9 million paid for the advertising services was a fraudulent transfer recoverable for the benefit of Stanford's victims.  Under the Texas Uniform Fraudulent Transfer Act ("TUFTA"), a transfer is recoverable if made with the actual intent to hinder, delay, or defraud any creditor of the debtor.  TUFTA allows a complete defense to any claims if the transferee can demonstrate both that (a) it took the transfer in good faith, and (b) in return for the transfer, it provided reasonably equivalent value to the debtor.

Under well-established caselaw, courts have found that the fraudulent intent required by TUFTA can be satisfied upon the showing that the debtor was operating a Ponzi scheme.  This principle, known as the "Ponzi scheme presumption," obviates the need for any future analysis as to the transferor's intent, and shifts the focus to the transferee's ability to satisfy the affirmative defenses provided under TUFTA.  

While it was uncontested that TGC received the transfers from Stanford in good faith, the parties disagreed as to whether TGC provided reasonably equivalent value in exchange that would satisfy TUFTA.  TUFTA defines value as:

property []transferred or an antecedent debt []secured or satisfied, but value does not include an unperformed promise made otherwise than in the ordinary course of the promisor’s business to furnish support to the debtor or another person.

A crucial distinction rests in recognizing the correct viewpoint from which to measure value.  While a transferee unsurprisingly argues that value should be analyzed from the vantage point of a buyer in the marketplace, courts instead recognize that the correct analysis focuses on whether the debtor's creditors - Stanford's victims - received value for the transfer.  As the court remarked, the primary consideration was the "degree to which the transferor's net worth was preserved."

Notably, the Fifth Circuit insinuated that the outcome of the case might have been different had TGC put forth any evidence showing that its services "preserved the value of Stanford's estate or had any utility from the creditors' perspective."  Rather, TGC only attempted to demonstrate the market value of its services - a strategy that wholly ignores the focal thrust of a TUFTA analysis.  Given that the burden shifts from the transferor to the transferee once intent is established, TGC's failure to present evidence to carry this burden was fatal to its case.  Concluding that TGC's services had no value to creditors of a Ponzi scheme and declining the invitation to carve out an exception to trade creditors, the Fifth Circuit reversed the lower court's decision and directed that judgment be entered in favor of the Receiver.

The outcome is noteworthy for several reasons.  First, it reinforces the principle that a transferee's status as a trade creditor does not simply absolve it from future liability under a fraudulent transfer claim.  Like any creditor, a trade creditor whose services either furthered the scheme or which provided no value to scheme victims cannot demonstrate reasonably equivalent value.  Second, the outcome bodes well for the Stanford receiver's similar suits seeking $36 million from multiple sports marketing firms that were on hold pending the outcome of the TGC suit.   Third, the holding should also encourage receivers to take a hard look at trade creditors that provided services to a Ponzi scheme, especially services intended to promote or tout the scheme such as advertising, sponsorships, and even charitable contributions.

A copy of the Opinion is below:



Utah Will Create Online White Collar Crime Registry

 “[Outside of budget], this is the Attorney General’s top priority for this legislative session because of the high level of affinity fraud we prosecute in our office and are aware of throughout the state. This registry is a tool to help empower and inform Utah citizens before investing with those who have illegal pasts and unsavory business practices that have led to second degree felony convictions.”

- Utah Attorney General Sean Reyes

Utah legislators have passed legislation making Utah the first state to publish an online database - complete with an offender's name, physical description, and recent photograph - identifying individuals convicted of specified white collar crimes including securities fraud, money laundering, and theft by deception.  HB378 (the "Bill"), which was sponsored by Representative Mike McKell, was passed by the Utah legislature this week, and Governor Gary Herbert has indicated he intends to sign the bill into law when it reaches his desk.  The database, modeled on the well-known registry used to identify convicted sex offenders, is proposed as a solution to combat an unusually high rate of financial crimes emanating from Utah, including "affinity fraud" targeting particular groups such as the large Mormon contingent that makes up 62% of the state's population.  Indeed, despite ranking in the lower 20% of all 50 states based on population, Ponzitracker's Ponzi Database showed that Utah ranked sixth in both the number of Ponzi schemes over $1 million and the losses attributed to Ponzi schemes since 2008 - surpassed only by New York, Florida, Texas, California, and Illinois.   

The White Collar Crime Registry (the "Registry"), as it is named, will modify the Utah Code of Criminal Procedure to establish a registry to compile a public database of all individuals convicted of the following second-degree felonies after December 31, 2005:

  • Section 61-1-1 or Section 61-1-2, securities fraud;
  • Section 76-6-405, theft by deception;
  • Section 76-6-513, unlawful dealing of property by fiduciary;
  • Section 76-6-521, fraudulent insurance;
  • Section 76-6-1203, mortgage fraud;
  • Section 76-10-1801, communications fraud; and
  • Section 76-10-1903, money laundering.

If convicted of one of the specified offenses, the following information of the offender will be listed on the Registry:

  • Name and alias(es);
  • Physical description, including date of birth, height, weight, and eye color;
  • recent photograph; and
  • convicted offenses.

A conviction for a qualifying second-degree felony will result in the offender's inclusion in the Registry for a period of ten years.  A subsequent offense will result in another ten-year inclusion, and a third conviction will result in a lifetime listing in the Registry.

However, an offender's conviction for a second-degree felony after December 31, 2005 does not automatically mandate their inclusion in the Registry.  For example, the Bill provides that individuals will not have to register for the Registry if they (1) have complied with all court orders since their conviction; (2) have fully satisfied all restitution imposed by the court; and (3) have not been convicted of any other offense for which registration would be required.  Additionally, the Bill sets forth a procedure for an individual to petition for their removal from the Registry after a period of five years from the completion of that individual's sentence, which includes providing notice to victims, obtaining a certificate of eligibility from a state agency, and ultimately a decision by the sentencing court that removal would not be contrary to the public's interests.

While the success of this initiative is far from guaranteed, it is hoped that the public shaming of fraud offenders in a "scarlet letter" fashion will serve not only as a deterrent to potential fraudsters but also as a resource to potential victims.  For example, while a significant portion of fraudsters often have multiple convictions for fraud, that information is not always necessarily available to the public or is difficult to locate in court dockets.  The hope is that the Registry will show up in an internet search for an individual's name by a potential victim attempting to do some form of due diligence.  

The Bill enjoyed widespread bi-partisan support, passing Utah's House by a 65 to 7 vote and receiving unanimous support in the Utah Senate.  A copy of the Bill is below:

utah bill



Appeals Court Revives Receiver's Suit Against Bank For Role In $190 Million Ponzi Scheme

A federal appellate court revived a lawsuit brought by the court-appointed receiver in Trevor Cook's $190 million Ponzi scheme against Associated Bank (the ""Bank"), ruling that the Receiver had stated a "plausible claim" that the bank had actual knowledge that it was providing "substantial assistance" to Cook's massive fraud.  The Eighth Circuit Court of Appeals reversed a lower court's order granting the Bank's motion to dismiss after finding that the Receiver had failed to adequately allege the Bank's actual knowledge of the fraud.  The decision will return the suit to the lower court for further proceedings.  

The Scheme

Cook's scheme, only second in Minnesota history to Thomas Petters' $3.65 billion Ponzi scheme, purported to achieve above-average returns through trading in commodities and futures.  Partnering with two firms, Crown Forex SA and JDFX Technologies, Cook pitched risk-free returns to potential investors, attempting to allay any concerns by explaining that Crown Forex was operated by Jordanians that complied with Islamic sharia law and thus could not charge him interest on the loans he took out.  Additionally, investors were told that transactions closed daily and thus were not subject to risk from being held overnight.  In total, Cook and his associates raised nearly $200 million from over 700 investors.  Yet, only $104 million of that amount was used to trade currency, of which $68 million was lost.  The remaining amounts were used to pay investor returns and fund the personal and business expenses of the schemers.

The Bank Lawsuit

The Receiver sued the Bank back in early 2013, asserting claims of aiding and abetting fraud, aiding and abetting breach of fiduciary duty, aiding and abetting conversion, and aiding and abetting false representations and omissions.  According to the Receiver, the Bank's substantial assistance allowed Cook's scheme to take in over $79 million.  The Complaint alleged, among other things, that Cook contacted Bank officials to discuss opening an account in the name of Crown Forex in order to receive investor funds. Following this, the Complaint described a pattern of "atypical banking activities" that, combined with other circumstantial evidence, represented actual knowledge by the Bank of Cook's scheme that was ignored in favor of the lucrative business brought in by Cook's scheme.  This included:

  • Servicing of the Crown Forex account despite lacking the required Secretary of State documents;
  • Transferring funds between the Crown Forex account and Cook's personal account, and in one instance allowing Cook to stuff $600,000 in cash in a box to allegedly go buy a yacht,
  • Not a single penny being transferred from the Crown Forex account held in Switzerland, as originally promised, and instead only the repeated transfer of millions of dollars between Cook's personal account and other co-conspirator accounts; and
  • Numerous suspicious transfers that should have triggered the Bank's obligations under anti-money laundering policies or the Bank Secrecy Act.

The Complaint also disclosed that the Bank recently entered into a Consent Order with the Comptroller of the Currency of the United States of America stemming from its failure to comply with Bank Secrecy Act requirements and anti-money laundering procedures.  

However, a Minnesota federal court later dismissed the action, agreeing with the Bank that the complaint failed to adequately plead both that the Bank had actual knowledge of Cook's fraud and that the Bank rendered substantial assistance to the scheme.  

The Appeal

On appeal to the Eighth Circuit Court of Appeals, a three-judge panel heard the Receiver's claims that the lower court's dismissal was in error.  The court first addressed the aiding and abetting claim, acknowledging that "an aider and abettor’s knowledge of the wrongful purpose is a ‘crucial element in aiding or abetting’ cases."  The court reviewed the numerous allegations set forth in the complaint, which included particular emphasis on the actions of a vice-president at the Bank named Lien Sarles.  Among these allegations were claims that (i) Sarles knowingly permitted the opening of Crown Forex accounts despite lacking proper documentation, (ii) Sarles knew that none of the nearly-$80 million deposited into the Crown Forex account by investors was ever transferred to the entity supposedly engaged in trading but rather to other accounts, (iii) Sarles personally approved several transfers requested by Cook - including transfers to Cook's personal account - even though Cook was not a signatory on the account, (iv) Sarles continued to approve transfers out of Crown Forex's account even after a Swiss financial regulator announced it had frozen Crown Forex's accounts and was investigating the company.

Based on these facts, the 8th Circuit remarked that

The receiver’s “complaint details the Ponzi transactions, including dates and amounts of deposits and withdrawals, spanning over a period of several years. Given [Associated Bank’s] vigorous denial of having known of the Ponzi scheme, it is hard to envision how knowledge might be pleaded with any more particularity than [the receiver] has pleaded it.

Next, the court addressed whether the Bank provided "substantial assistance" in furthering the fraud - which it recognized must be "something more than the provision of routine professional services." Again, the court cited Sarles' presence and participation in the scheme's interactions with the Bank, including the acts of knowingly allowing Crown Forex to open an account despite not being registered with the state of Minnesota and later approving Cook's transfers out of the account despite his status as a non-signatory.  As the court concluded,

We cannot predict whether a jury, surveying the evidence supplemented by discovery, will find Associated Bank either had actual knowledge of or substantially assisted in the asserted torts. But the facts alleged in the complaint give the receiver’s claims “facial plausibility”—the receiver has pled “factual content that allows the court [and a jury] to draw the reasonable inference that the defendant is liable for the misconduct alleged.

Of note, the court declined to address the Bank's defense that the Receiver was barred from asserting the claims based on the in pari delicto doctrine - a defense often invoked in bankruptcy proceedings which operates to prevent wrongdoers at equal fault to recover from one another.  That issue, the court decided, was more appropriately decided by the lower court.

The 8th Circuit's Order is below:

8th Circuit Cook Order