Net winners in a Ponzi scheme - those who have profited -
often get sued to return the profits paid to them. Those who lost money (net
losers) usually don't get sued, unless they were not in "good faith." It is a
bankruptcy trustee or regulatory receiver calling the shots of who does and
doesn't get sued in the process of unraveling a Ponzi scheme in a subsequent
insolvency proceeding. When it comes time to distribute recovered funds to
investors, the net winners and net losers frequently do battle over the type of
distribution made out of an insolvency proceeding, with each faction fighting
for a bigger slice of the pie. Either the priority scheme in the Bankruptcy Code
or a court-approved distribution plan will govern how money is to be
When there is no bankruptcy or receivership proceeding to
supervise the administration and distribution process, then what? Net winners
are sitting on the profits paid to them, having recovered their original
investment plus some. But what about the net losers? Where does the money come
from to make net losers whole?
In Carroll v.
Stettler, 2013 U.S. Dist. LEXIS 76519 (E.D. Pa. May 31, 2013) [an enhanced version of this opinion is available to lexis.com
subscribers], the net losers opted for self-help. In that case, the
net losers sued the net winners to recover the profits paid to those
net-winning investors. This latest decision in a series of decisions handed the
net losers a summary judgment, making the effort to take matters into their
owns hands worthwhile.
The case arose out
of a scheme run by Lizette Morice through her company Gaddel Enterprises, Inc. Gaddel
claimed that it purchased properties that were in tax foreclosure at a
substantial discount and then sold the properties at a large profit. Morice and
others solicited more than $7,000,000 from individuals by offering a share of
the profits for a minimum of a $1,000 investment. No real estate transactions
were ever conducted and most investors lost their entire investment. Gaddel did,
however, pay some investors returns on their investments of over $5.1 million with
funds from other investors. So, in classic Ponzi tradition, there were a few
net winners and many net losers.
Morice admitted to running a Ponzi scheme in her criminal
proceeding, and the net losers of the scheme were left to their own resources
in attempting to recover their losses. A few years ago, they filed a class
action against the net winners seeking avoidance of Gaddel's actual fraudulent
transfers under state law. And so far at least, the case has been largely
successful. The district court has:
So when all else fails and no trustee or receiver is
appointed to marshal assets, net loser victims of a Ponzi scheme may want to
consider self-help and seek to recover money from net winners themselves.
Read additional articles at The Ponzi Scheme
Kathy Bazoian Phelps is the co-author of The Ponzi Book: A Legal
Resource for Unraveling Ponzi Schemes (LexisNexis 2012), along with
Hon. Steven Rhodes. The Ponzi Book, recently reviewed by the ABI Journal and Commercial
Crime International, is available for purchase at www.lexisnexis.com/ponzibook,
and more information about the book can be found at www.theponzibook.com.
Watch Kathy's interview on the The Not So Legal Show.
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