In a case demonstrating the interplay between federal bankruptcy law and Ponzi scheme litigation, a Michigan town has agreed to repay funds it received from a $12.9 million Ponzi scheme - even though the town suffered nearly $1 million in losses. After previously making a $500,000 good-faith payment, the Comstock Township announced it will repay $190,000 to a court-appointed bankruptcy trustee, bringing the total settlement to nearly $700,000. The settlement will end litigation by the court-appointed trustee, and will also entitle the Township to participate in later distributions to victims.
The Township invested a total of $1.75 million with Dante DeMiro, who owned and operated an investment firm named MuniVest. From August 2007 to September 2010, DeMiro promised potential clients that he would invest their funds in low-risk certificates of deposit ("CDs") that carried little risk. This was especially important to DeMiro's clients, which were largely composed of state and local entities such as municipalities, credit unions, labor unions, and even a school district. DeMiro had forged connections with various officials while previously employed as a registered representative with various Michigan investment firms. In total, DeMiro raised more than $12 million from various public institutions. DeMiro was later criminally charged, and received a 10-year prison sentence after pleading guilty to bank and wire fraud charges.
The Comstock Township was one of DeMiro's victims, handing over $1.75 million in April 2009 that it believed would fund the purchase of seven CDs. DeMiro provided the Township with regular updates and reports summarizing their investments, and on several occasions sent checks to the Township as a result of the maturation of some of these CDs. According to the bankruptcy trustee, the total amount returned to the Township as purported principal and interest exceeded $1 million.
Bankruptcy law v. Non-bankruptcy law in Ponzi Schemes
Under federal bankruptcy law, a trustee can pursue the recovery of "preferential" transfers that were made within a certain time period before the bankruptcy petition date. The reasoning behind this comes from typical bankruptcy cases, where payments made during a "preference" serve to benefit one creditor at the expense of other creditors. These powers are stronger than those in a non-bankruptcy Ponzi proceeding, where federal law typically only allows the recovery of profits received by victims (as always, subject to exceptions). Thus, while non-bankruptcy law distinguished between the receipt of profits and principal, bankruptcy law simply looks to whether the transfers were made within a certain time window. Under bankruptcy law, this window is two years, as prescribed by 11 U.S.C. 548, while longer windows are also possible if provided under a corresponding state statute.
As described in the criminal complaint, the Township began investing with DeMiro in April 2009 and later received transfers exceeding $1 million purportedly representing matured CDs. Because DeMiro and MuniVest declared bankruptcy in October 2010, the "look-back" period for fraudulent transfers would have extended to October 2008 - well before the Township began investing with DeMiro. Thus, under bankruptcy law, the amount of the Township's total investment was irrelevant, as allowing the retention of more than $1 million in transfers would unfairly benefit the Township to the detriment of other investors not as fortunate. Indeed, by returning the transfers, the Township will be entitled to participate in distributions once the bankruptcy trustee decides to begin returning the marshaled assets.
Going forward, the Township has already implemented measures to ensure that a similar situation cannot occur. This has included size limits on the amount of any outside investment of Township funds, as the town's MuniVest investment of $1.75 million nearly matched the entire general fund budget of $2.3 million. Now, the town current investments are all liquid, and not one exceeds $250,000.
A copy of DeMiro's criminal complaint is here.