The court-appointed bankruptcy trustee for the third-largest Ponzi scheme in history has assembled a legal team hailing from all over the globe as the quest to recover assets for victims will now target foreign investors that were fortunate enough to profit from their investment. Doug Kelley, the trustee tasked with returning funds to victims of Thomas Petters' $3.65 billion Ponzi scheme, has secured legal representation in countries from Germany to Bermuda to the British Virgin Islands as he prepares to launch a series of "clawback" lawsuits. At stake in the lawsuits: more than $100 million of "false profits" paid to Petters' investors, including offshore hedge funds.
Clawback lawsuits, as they are known in the landscape of Ponzi scheme litigation, seek to "claw back" fictitious profits paid to scheme investors in excess of those investors' initial investments. The suits have enjoyed nearly-universal approval from overseeing courts, who justify the suits on the basis that the returns paid were not derived from legitimate business activities but rather simply the re=distribution of funds from incoming investors. The suits have also played a significant role in the recovery of funds for victims that were not as fortunate to recoup their investment. As most schemes are discovered only after their collapse, clawback lawsuits and third-party lawsuits often represent victims' best hope for any recovery. Indeed, Kelley previously stated that the "big money" to be recovered would be through clawback lawsuits.
Thomas Petters was arrested in late 2008 after authorities alleged that his electronics factoring business was, in reality, a massive Ponzi scheme. Petters would later plead guilty (although he would later unsuccessfully attempt to have his sentence reduced) and is currently serving a 50-year prison term in a Kansas federal prison. In addition to Petters, authorities obtained ten other convictions of individuals tied to the scheme.
To date, Kelley has recovered approximately $110 million for the benefit of victims, while related bankruptcy and receivership proceedings have pulled in another $300 million. Considering that total losses from the scheme are estimated at approximately $2 billion after factoring in payments made to investors, the $410 million recovered to date represents approximately 20% of total losses. By Kelley's own estimate, potential recoveries through the use of clawback lawsuits could be more than $500 million - including more than $323 million sought from hedge funds Epsilon Investment Management and Arrowhead Capital Management.
Kelley's legal team was recently able to obtain the lists of investors in the two above hedge funds, which will allow them to perhaps identify further clawback suit targets. But while U.S. laws are quite clear on recovering funds in these situations, the laws of other jurisdictions where suits may be brought are not nearly as clear. Nor is it clear whether Kelley will have the option to bring such suits in a U.S. bankruptcy court. Kelley has indicated that, before proceeding in each jurisdiction, a cost-benefit analysis will be employed to gauge the likelihood of success.