Victims of the largest Ponzi scheme in Ohio history will now recover at least a small portion of their losses after reaching a settlement to recover $1.4 million in "false profits" received by a more fortunate investor. Glen Galemmo, a former money manager currently serving a 15-year prison sentence, took in more than $100 million from hundreds of investors who trusted the Ohio man's promises of above-average returns through investments in undervalued stocks. While authorities have not sought the appointment of a receiver to collect assets for victims, a pair of Cincinnati attorneys have spearheaded efforts to recover funds that might be used to temper losses.
Galemmo operated Queen City Investment Fund ("Queen City"), along with a dozen other investment entities. Touting himself as an experienced trader, Galemmo promised outsized returns through investments in stocks, bonds, futures, and commodities. Investors were told Queen City had enjoyed a streak of consistently above-average returns, including a return of nearly 20% in 2008 when the S&P 500 experienced a -38.49% loss. Galemmo assured investors that Queen City was audited annually, and provided monthly statements showing steady returns. Galemmo raised more than $100 million from individuals, trusts, and even charities.
However, Galemmo's touted trading prowess was pure fiction. Instead, Galemmo used new investor funds to pay his promised returns - a classic hallmark of a Ponzi scheme. Nor was the Queen Fund audited; rather, Galemmo simply listed the name of an audit firm that had not had a relationship with Galemmo or his fund since 2003. Investors received fictitious account statements, and Galemmo paid himself tens of millions of dollars in fictitious management fees, which he used to purchase real estate, pay fictional interest and principal distributions, and even to operate other businesses such as entertainment complexes.
The scheme collapsed in July 2013 when investors received an email from Galemmo stating that the funds were shutting down and directing all further inquiries to an IRS agent. Victims filed a lawsuit later that month, and Galemmo was later arrested. He agreed to plead guilty shortly thereafter, and recently received a 15-year sentence.
The prospect of recovery for victims appeared bleak, with one source reporting that the Department of Justice has estimated that victims could recoup 10% to 20% of their investment. Authorities were able to quickly seize what remained of Galemmo's assets, which included over $500,000 in cash, various real estate including a condo in Florida and Galemmo's former office building, and over $100,000 in automobiles.
Investors Take Matters Into Their Own Hands
Earlier this fall, the Commodity Futures Trading Commission ("CFTC") filed a civil enforcement action against Galemmo and Queen City. While government agencies such as the CFTC and the Securities and Exchange Commission that initiate civil enforcement actions typically request the appointment of a receiver when there appear to exist substantial assets that could be recovered and later distributed to victims, here the CFTC did not request the appointment of a receiver.
One of the largest sources of recovery for victims of Ponzi schemes typically comes from lawsuits against scheme investors fortunate enough to ultimately profit from their investments. Aptly known as "clawback" suits in Ponzi jurisprudence, the suits seek recovery of "false profits" consisting of amounts in excess of that investor's net investment in the scheme. Because the scheme operator does not generate the promised returns from legitimate activities, these transfers are nothing more than the redistribution of new investor funds. While extensive caselaw generally recognizes that clawback targets can keep the amount of transfers adding up to their total investment in the scheme (absent signs that the investor did not act in good faith in receiving the transfers), the law is clear that any receipt of funds over an investor's net investment can be recovered as "false profits."
One of the "net winners," as they are known, in Galemmo's scheme was Michael Willner. Willner was one of Galemmo's original investors, whose initial investment of several million dollars allegedly multiplied several times according to fictitious account statements provided by Galemmo. Willner also allegedly served as a recruiter for new Galemmo investors, and the lawsuit alleged that Galemmo paid commissions to Willner for referred investors. Willner allegedly withdrew "millions" of dollars in excess of his original investment.
Willner sent out an incriminating email to fellow investors in the days after Galemmo's announcement that the funds would be shutting down, stating:
“To those of you that I brought into the fund you have my deepest and most sincere apologies...I am embarrassed and shamed by my actions. Like most of us I ignored the poor statements and lack of transparency in favor of the high returns. In hindsight, these warning signs should have alerted me to probe deeper and ask appropriate questions.
While Willner allegedly received "millions" in excess of his original investment, the settlement takes into account his financial condition, and also discloses that a majority of the settlement amount will come from a federal tax refund due to Willner. The remainder will come from the sale of Willner's interest in a private company that was purportedly purchased with funds traceable to Galemmo's scheme.
The settlement seeks to create a class composed of all victims that invested with Galemmo from 2002 until the scheme's collapse in 2013. While the motion to approve the settlement does not provide details on the disbursement of settlement funds, it is likely that some kind of claims process will have to occur and be approved by the overseeing Ohio judge. The eventual distribution to each investor will be known only after a determination of each investor's approved loss and the total amount of losses.
The law firm behind the lawsuit, Santen & Hughes, was the same law firm that filed the initial lawsuit accusing Galemmo of running a fraud in the wake of the scheme's collapse. The firm has also filed other lawsuits against third parties seeking recovery for Galemmo victims, including a suit against several prominent financial institutions related to their dealings with Galemmo. The firm was able to interview Galemmo before he reported to federal prison, and it is possible that other net winners could be pursued.
The motion seeking approval of the settlement is below: