Hundreds of victims of a massive $220 million Utah Ponzi scheme may soon become part of an extremely rare group of Ponzi victims who were able to recover 100% of their principal losses. Gil Miller, the court-appointed receiver over Management Solutions, recently obtained court approval for a proposed distribution plan that contemplates a "reasonable possibility" that all investors will realize a 100% recovery of their experienced losses. Perhaps ironically, the occurrence - sometimes called the 'holy grail' of Ponzi scheme jurisprudence - will be possible only because the alleged masterminds of the scheme agreed to forfeit their 51% interest in Management Solutions as a condition of settlement.
The Commission brought charges against Management Solutions and its operators, Wendell Jacobson and his son Allen Jacobson, in December 2011, alleging that the company had been operating a Ponzi scheme since at least 2008 through the purported offering of 5% to 8% annual returns through the renovation and resale of apartment complexes throughout the country. Potential investors were told that the company purchased apartment complexes with low occupancy rates at a deep discount, that their underlying principal investment was safe, and that they could expect to receive monthly interest payments. Co-owner Wendell Jacobson represented to investors that Management Solutions had achieved historic returns of 12% to 15%, and that only one apartment investment had failed to return a profit - in which case Jacobson covered the loss personally so that investor returns would remain unchanged. Additionally, Management Solutions represented that, even during its worst performing years, investors had still enjoyed annual returns of approximately 13%. Based on these misrepresentations, the company raised over $200 million from 225 investors.
The Jacobsons were members of the Church of Jesus Christ of Latter Day Saints, which the SEC alleges they exploited to solicit additional investors. However, rather than use investor funds for their stated purpose, investments were almost immediately diverted to one of several collecting accounts, where funds were commingled with other investor funds. Investor returns were paid from new investor funds - a classic hallmark of a Ponzi scheme. According to the SEC's complaint, as of December 31, 2010, one of the collecting accounts had outstanding debts to investors and other LLC's of approximately $103 million. However, the current balance of that account was under $200,000.
Proposed Distribution Plan
The largest asset class held by Management Solutions was its significant real estate holdings, which largely consisted of apartment complexes. The real estate was heavily encumbered by mortgages and its value suffered greatly during the economic slowdown, which was likely a significant factor contributing to the mounting losses. However, a resurgent real estate market has boosted property values accordingly. Last year, the receivership court approved the sale of several dozen apartment complexes owned by Management Solutions for nearly $340 million.
The Receiver hopes to make an initial distribution of roughly $100 million to defrauded victims, while an additional $31 million will be available at a later date. The outcome is possible by (1) accounting for payments received by investors in the form of interest or other distributions, and (2) the use of a rising tide investment method, which seeks to ensure that investors that received little or no distributions are paid before those who were fortunate enough to receive more significant distributions. The rising tide method will be followed until all investors recoup 100% of their approved losses.
Twists and Turns
The case has not been without its share of twists and turns along the way. Miller took over as receiver approximately one year ago from previous receiver John Beckstead, who resigned to serve a mission for the Mormon Church. Beckstead had faced mounting pushback from Management Solutions investors, including strong opposition to a previous liquidation plan that would have ultimately resulted in a recovery of approximately 50% to investors. That plan was ultimately shelved by Beckstead, and Miller took over as receiver shortly thereafter.
An Elite Class
Management Solutions joins just two other schemes in recent memory to accomplish the feat of fully repaying defrauded Ponzi victims: Scott Rothstein's $1.2 billion Ponzi scheme and David Dadante's $58 million scheme. Such an outcome is extremely rare, as it is estimated that the average investor recovery from a Ponzi scheme is less than 10%.
As illustrated by the dearth of schemes that have achieved such a result, a valuable asset or recovery source has been the driving force for the recovery in each scheme. In Rothstein's scheme, the Trustee was able to bridge the shortfall between recoveries and losses through a contribution from TD Bank, which was ultimately tagged for hundreds of millions of dollars in verdicts and settlements for the alleged involvement of its regional vice president with Rothstein. In the aftermath of Dadante's scheme, the receiver was able to strategically manage and later sell a large chunk of stock that resulted in a windfall to the victims and ultimately resulted in a "bonus" payment to the receiver for his success. And in Management Solutions, the decision to hold onto the real estate assets at the center of the scheme, as well as the Jacobson's agreement to surrender their 51% interest, ultimately allowed the receiver to recoup enough funds to fully repay investors.
Ponzitracker's list of top Ponzi scheme recoveries is here.
A copy of the Amended Motion for Approval of Plan Distribution is below: