A group of investors sued by the court-appointed receiver of R. Allen Stanford's alleged Ponzi scheme has filed their opposition to an attempt to have a judicial declaration that Stanford's scheme was, in fact, a Ponzi scheme. Receiver Ralph Janvey had filed a motion for summary judgment seeking the determination that Stanford's purported operation of selling certificates of deposit ("CD's") to investors was nothing more than an elaborate Ponzi scheme. Such a move would not only provide the first judicial decree that Stanford's operation was a Ponzi scheme, but would also serve the added effect of bolstering Janvey's campaign to recover interest payments made to investors as fraudulent transfers. Without a judicial declaration, either civil or criminal, investors finding themselves targets of Janvey's suits have incentive to contest the issue, ultimately forcing the receiver to expend more time to the suits. Already, at least one investor has taken issue with Janvey's fees and sought an investigation.
The importance of Janvey's quest to have a judicial stamp of approval that Stanford operated a Ponzi scheme lies in the legal basis under which Janvey is proceeding. Janvey seeks to recover interest payments paid to purchasers of Stanford-issued CD's, arguing that he is entitled to these fraudulent transfers under the Uniform Fraudulent Transfer Act ("UFTA"). Under the UFTA, a transfer is fraudulent if (1) the transferor either made the transfer with actual intent to hinder or defraud, or (2) the transfer was constructively fraudulent. Proceeding under the latter theory requires that the debtor does not receive "reasonably equivalent value" in return for the transfer. Courts have found this to occur when either the debtor is insolvent at the time of transfer, or after the transfer is left with insufficient capital to continue the business.
To recap, a fraudulent transfer is recoverable under the UFTA when the debtor either had actual intent to defraud or the transfer was constructively fraudulent. However, the evolving Ponzi scheme caselaw has yielded several important conclusions in this area. First, the establishment of the existence of a Ponzi scheme is sufficient to prove a debtor's intent to defraud. In re McCarn’s Allstate Finance, Inc., 326 B.R. 843, 850 (Bankr. M.D. Fla. 2003). This conclusion provides the 'actual intent' requirement of UFTA. Additionally, courts have also concluded that an established Ponzi scheme is effectively insolvent at inception, thus preventing a transferee from claiming they received reasonably equivalent value. Thus, the judicial declaration that Janvey seeks would in essence remove any bargaining chips victims may have in opposing such a clawback suit. As observed by the Court in McCarn's Allstate Finance, the establishment of a Ponzi scheme effectively ends the Receiver's duty:
Once it is established that the Investors’funds were transferred by Debtor as part of a Ponzi scheme, the Trustee has met her burden with respect to avoiding those transfers so long as they were made within either the [look-back periods contained in the Bankruptcy Code or state law].
Not surprisingly, the victims opposing Janvey's motion for summary judgment make arguments that (1) the interest payments were received in good faith, and (2) the investors exchanged reasonably equivalent value. The victims seek to distinguish the caselaw cited by Stanford, arguing that unlike those cases, the payment of interest according to the CDs were contractual payments made according to contractual liability - not merely promises of regular returns as seen in other Ponzi schemes. In support, the victims cite a 2002 Connecticut federal case in which dollar-for-dollar forgiveness of contractual debt in satisfaction of an antecedent debt was determined to be reasonably equivalent value. In re Carrozzella & Richardson, 286 B.R. 480, 490-91 (D. Conn. 2002). The victims also attack the strict standard of proof required for Janvey's request, alleging that the evidence raises numerous genuine issues of fact that prevent summary judgment.
Under the federal rules of civil procedure, Janvey is entitled to file a reply to the victim's response.
A Copy of the Investor's Opposition to Janvey's Motion for Summary Judgment is here.