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Gredd v. Bear, Stearns Sec. Corp. (In re Manhattan Inv. Fund, Ltd.) - 359 B.R. 510 (Bankr. S.D.N.Y. 2007)

Rule:

Actual intent to hinder, delay, or defraud may be established as a matter of law in cases in which the debtor runs a Ponzi scheme or a similar illegitimate enterprise. Thus, courts nationwide have recognized that establishing the existence of a Ponzi scheme is sufficient to prove a debtor's actual intent to defraud. Moreover, acts taken in furtherance of the Ponzi scheme, such as paying brokers commissions, are also fraudulent. Every payment made by the debtor to keep the scheme on-going was made with the actual intent to hinder, delay, or defraud creditors, primarily the new investors. 

Facts:

“This adversary proceeding is an outgrowth of a massive Ponzi scheme executed by Michael Berger ("Berger") a convicted felon and fugitive," who created and used the Fund through his wholly owned company Manhattan Capital Management, Inc ("MCM"), as his vehicle to perpetrate fraud. On January 14, 2000, following an investigation into the Fund's trading activities, the Securities and Exchange Commission (the "SEC"), filed a complaint alleging securities fraud against the Fund, MCM and Berger. The SEC obtained an asset freeze and the appointment of Helen Greddas Receiver for the Fund. On March 7, 2000 (the "Petition Date"), the Receiver caused the Fund to file a voluntary petition for relief under chapter 11 of title 11, United States Code (the "Bankruptcy Code"), and on April 4, 2000, the Receiver was appointed Trustee of the Fund under Chapter 11 of the Bankruptcy Code. On April 24, 2000, the Trustee commenced this adversary proceeding against Bear Stearns. In her complaint, the Trustee sought to avoid, pursuant to section 548(a)(1)(A) of the Bankruptcy Code, three categories of transfers that were made to Bear Stearns in connection with the Fund's short selling activities during the last ten months of its operation. Count I of the complaint seeks to avoid $ 141.1 million in margin payments which Berger caused to be transferred to Bear Stearns from the Fund's account with the Bank of Bermuda. Count II sought to recover approximately $ 1.7 billion in short sale proceeds as generated by the sale of stock that the Fund borrowed from Bear Stearns. Count III of the complaint sought to recover approximately $ 1.9 billion worth of securities that were purchased with the short sale proceeds (plus other monies in the Fund's margin account), that were delivered to Bear Stearns to cover stock loans to the Fund. Count IV of the complaint seeks equitable subordination of any claim Bear Stearns may assert in the Fund's chapter 11 case to all other claims.

Issue:

Were the transfers made with actual intent to hinder, delay, or defraud other creditors?

Answer:

Yes.

Conclusion:

The court held that the transfers were presumed to have been made with actual intent to hinder, delay, or defraud other creditors. The court also held that the firm was an initial transferee from which an avoided transfer could be recovered under 11 U.S.C.S. § 550(a)(1) because it exercised dominion and control over the funds. The court further held that the firm failed to establish good faith under 11 U.S.C.S. § 548(c) because the firm was on inquiry notice for over a year before it closed the account.

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