JP Morgan Wants To Make It Harder To Recover Ponzi Scheme Transfers

JP Morgan Chase, the banking behemoth that agreed last year to pay over $2.5 billion in civil and criminal penalties to resolve claims it turned a blind eye to Bernard Madoff's massive Ponzi scheme, has filed at least two "friend of the court" briefs this year in a quiet campaign to make it more difficult for receivers and bankruptcy trustees to recover funds transferred to third parties from a suspected Ponzi scheme.  In a recently-filed amicus curiae brief in Janvey v. The Golf Channel, a case currently on appeal to the Texas Supreme Court that involves payments made by convicted Ponzi schemer R. Allen Stanford to purchase television advertising to promote his scheme, the bank asked the Texas Supreme Court to invalidate the "Ponzi scheme presumption," a tool widely used by receivers and trustees in recovery efforts.  The brief, filed by a high-powered New York law firm and a renowned University of Michigan law professor, is the second filed this year by JP Morgan in cases involving contested suits to recover transfers to third parties in Ponzi schemes - with the first coming earlier this year in a case before the Minnesota Supreme Court that rejected the 'Ponzi scheme presumption.'

Madoff's "Primary Banker" 

JP Morgan was Madoff's primary banker for several decades prior to the conman's arrest in 2008, with billions of dollars flowing through Madoff's bank accounts and the bank even investing with Madoff and selling structured products tied to Madoff feeder funds.  The bank profited handsomely from the affiliation, ultimately reaping more than $500 million in commissions and fees despite a growing chorus from inside the bank that was increasingly skeptical of Madoff's legitimacy.  The bank waited until just months before Madoff's arrest to make a suspicious activity filing with a British regulator while simultaneously liquidating its $276 million investment with Madoff.  In January 2014, the bank agreed to pay $2.6 billion in civil and criminal penalties, including $1.7 billion which was earmarked for a fund to compensate Madoff victims.  

The Ponzi Scheme Presumption

In the case of a collapsed Ponzi scheme, a receiver or bankruptcy trustee is often appointed and tasked with recovering assets for the benefit of defrauded victims.  One of the most common avenues used to recover funds often comes in the form of "clawback" lawsuits that seeks to recover funds transferred to third parties, including participants that profited from their investment and other third parties that may have provided services to or for the scheme.  Under both state law and the U.S. Bankruptcy Code, these fraudulent transfer actions are often pursued through theories of either actual fraud or constructive fraud.  One, actual fraud, involves an actual intent to hinder, delay, or defraud creditors, while a constructively fraudulent transfer focuses not on the transferor's intent but rather the underlying transaction and whether "reasonably equivalent value" was provided.   

In recent years, courts have employed a 'Ponzi scheme presumption' in holding that a transferor's fraudulent intent is assumed upon the showing that the transfer was made in furtherance of a Ponzi scheme.  Indeed, until earlier this year (and as discussed in depth below), courts unanimously endorsed the 'Ponzi scheme presumption,' reasoning that “transfers made in the course of a Ponzi scheme could have been made for no purpose other than to hinder, delay or defraud creditors.” Bear, Stearns Sec. Corp. v. Gredd (In re Manhattan Inv. Fund, Ltd.), 397 B.R. 1, 8 (S.D.N.Y. 2007).  The benefits of such a presumption benefit receivers and trustees, who are able to satisfy the actual intent prong of the fraudulent intent analysis without proceeding through a rigorous analysis of the actual intent of the transferor or weighing circumstantial evidence to demonstrate adequate 'badges of fraud.'  As such, the 'Ponzi scheme presumption' is a favored tool of receivers and trustees in pursuing recipients of fraudulent transfers.

The Minnesota Supreme Court Issues Its Finn Decision - In Which JP Morgan Was Also Involved 

Earlier this year the Minnesota Supreme Court issued an opinion in Finn v. Alliance Bank, a case brought by a receiver seeking to recover fraudulent transfers made to various financial institutions (not JP Morgan) in a Ponzi scheme. The district court relied on the 'Ponzi scheme presumption' and sided with the receiver.  On appeal, the appellate court entered a mixed ruling, finding that certain parts of the presumption were supported by Minnesota's fraudulent transfer statute but concluding that one portion was not.  On review, the Minnesota Supreme Court sided against the Receiver and found that:

Even if there is evidence to support the inference that Ponzi-scheme operators generally intend to defraud investors, MUFTA does not contain a provision allowing a court to presume fraudulent intent. Instead, MUFTA contains a list of factors, commonly referred to as “badges of fraud,” that a court may consider to determine whether a debtor made a transfer with an actual intent to defraud creditors. See Minn. Stat. § 513.44(b). That “the debtor was involved in a Ponzi scheme” is not among them.


Thus, although a court could make a “rational inference” from the existence of a Ponzi scheme that a particular transfer was made with fraudulent intent,  Finn, 838  N.W.2d at 599, there is no statutory justification for relieving the Receiver of its burden of proving or for preventing the transferee from attempting to disprove fraudulent intent.

The court "rejected each component of the Ponzi scheme presumption." 

Perhaps unsurprisingly, JP Morgan was one of three banks which filed an amicus curiae brief in the Finn case.  The bank was also represented by the same University of Michigan law school professor and high-powered New York law firm.  While that brief is not immediately available, it would not be a stretch to assume that the bank's position was also firmly against adoption of the Ponzi scheme presumption.

Janvey v. Golf Channel

In Janvey, the court-appointed receiver in Allen Stanford's massive Ponzi scheme filed a clawback suit seeking the return of nearly $6 million paid to The Golf Channel ("TGC") for television advertisements.  While a trial court had likened TGC to an 'innocent trade creditor' and dismissed the claims, a federal appeals court sided with the receiver and found that the services provided by TGC did not provide any "value" to Stanford's creditors as required under Texas's fraudulent transfer statute.  However, that same court later vacated that opinion and entered a different opinion certifying the question of what constituted "value" under TUFTA to the Texas Supreme Court.  

In an amicus curiae brief filed by JP Morgan, the bank first acknowledged that the question certified by the U.S. Court of Appeals for the Fifth Circuit concerned the definition of value under "TUFTA," but argued that:

[A]lthough the Fifth Circuit did not specifically certify a question with respect to the Golf Channel I panel’s conclusion that all transfers of any kind made by a Ponzi scheme perpetrator are intentional fraudulent transfers, the certified question concerning the establishment of “value” under TUFTA would not even arise absent the conclusive Ponzi scheme presumptions applied in Golf Channel I. 

JP Morgan also suggested that "the Fifth Circuit “disclaim[ed] any intention or desire that the Supreme Court of Texas confine its reply to the precise form or scope of the question certified.” 

With that aside, the brief launches into an unabashed attack on the 'Ponzi scheme presumption,' beginning with a pointed attack on the validity of the presumption:

The conclusive presumption applied by the Golf Channel I panel that all transfers by an entity operating a Ponzi scheme are by definition intentional fraudulent transfers is not a correct statement of Texas law. It has no basis in TUFTA’s statutory text, misapprehends the purposes of fraudulent transfer law, and has never been endorsed by a Texas court. Without this presumption, the Receiver’s case would have been dismissed on the pleadings, because under longstanding principles of fraudulent transfer law, a debtor’s purchase of goods or services in an arms-length transaction and at a reasonable market rate is not an intentional fraudulent transfer—regardless of whether the debtor is generally engaged in fraud or uses the fruits of the transaction in a manner that somehow deepens its insolvency. Application of this presumption eliminated the Receiver’s burden of actually pleading and proving its prima facie case, and immediately shifted the burden to Golf Channel to satisfy TUFTA’s statutory affirmative defense for transferees who take in good faith and for value. Nothing in TUFTA suggests that this wholesale elimination of the plaintiff’s burden of proof is appropriate. 

The brief then embarked on a detailed dissection and analysis of TUFTA and an attempt to distinguish the current status quo.  The bank argues that the Ponzi scheme jurisprudence developed by federal courts in recent decades is mistaken, that the line had been blurred between fraudulent transfer actions and fraud actions, and that the current jurisprudence was the product of a mistaken emphasis on the transferor's general business rather than the specific transaction(s) at issue.  Like Finn, the bank urged the Texas Supreme Court to focus on the specific transactions at issue and conclude that no 'Ponzi scheme presumption' should apply.  


While the identity of any other third parties filing amicus curiae briefs is unknown, JP Morgan's involvement in both the Finn and Golf Channel case suggests a deliberate and concerted campaign by the bank to target a legal precedent that has existed for several decades and has greatly assisted in the recovery of funds to be distributed to victims of Ponzi schemes.  The effort are far from altruistic; financial institutions are routinely targeted by receivers or trustees for their role in providing services to Ponzi schemers. However, while those institutions frequently assert a defense that they owe no duty to investigate their customers, fraudulent transfer actions contain different elements; the establishment of actual fraudulent intent then places the good faith of a transferee at issue.  This trend is likely to continue as settlements with third parties in Ponzi scheme litigation are often the greatest source of recoveries.  Indeed, an Ohio bank was just recently hit with a $72 million judgment that found the bank liable for each of the transfers that passed through its accounts.  

JP Morgan's amicus curiae brief is below:

 JPM Amicus (1)