Spring 2017 • Issue 60, page 14
Twists, Turns and Tactics: Successful Ponzi Scheme Litigation in Receivership
By Mirman, Alan*
Most receivership cases don’t consume seven
years or involve international searches uncovering overseas assets, and
locating a fraudster in a sushi bar in Vancouver. Each case follows its
own unique path, but perhaps none with more strategy issues, critical
timing, and intrigue, than the unwinding of a Ponzi scheme. I had the
pleasure of representing Stephen J. Donell in such a case, which recently
wrapped up after 7½ years. It took that long for the Receiver to locate,
collect, administer and distribute the ill-gotten gains of an entity we’ll
call XYZ Enterprises. This article recaps some of the many twists, turns
and tactics which led to a successful outcome, a delighted judge, and
appreciative investors. Let me tell you the story…
Filing of the Action by Plaintiff and Appointment of
Plaintiff Investor filed the lawsuit in 2009
seeking damages for breach of a document entitled “Security Agreement” by
XYZ and its principal, the fraudster, whom we’ll call Mr. B, alleging that
XYZ had breached its promise of monthly interest payments of at least 18%
per annum on invested funds. Plaintiff moved for the appointment of a
receiver, and Defendants stipulated, likely because Mr. B saw cooperation
as his figurative but effective “get out of jail” card. While the Order
Appointing Receiver vested in the Receiver control over all the assets of
XYZ, it was the later expansion of those powers during the course of the
receivership that played a pivotal role in maximizing collections.
Investigation by Receiver, Retention of Professionals and
Expansion of Receivership.
The Receiver took
control of the office and assets of XYZ but most business records of the
activities of XYZ had been destroyed. The Receiver pieced together
information from the minimally available investor records and bank account
information. Due to the poor records, the Court granted the Receiver
further powers, including obtaining control of Mr. B’s laptop and hiring a
forensic computer consultant to examine that laptop. The Receiver also
hired a forensic accounting firm to recreate books and records for XYZ
based on subpoenaed account information. The Receiver could then determine
who were “winners” and “losers” and identify secreting of funds.
After a legal battle
over attorney/client privilege and privacy issues with Mr. B, the
Receiver’s computer consultant reviewed records hidden in databases
maintained on Mr. B’s personal laptop computer, which proved useful in the
search for hidden assets.
From inception, the
Receiver set up a comprehensive and very user-friendly website to allow
investors to access information, including filings and Status Reports,
about the status of the case. The Receiver and counsel kept the process as
transparent as possible to keep the Court and investors advised of the
status. During the seven year case, I filed seventeen Interim Reports and
Fee Applications. The multiple benefits are obvious – first, the Court,
counsel and visitors to the Receiver’s website stayed apprised of all
developments. Second, and not to be minimized, the fees incurred by
Receiver, counsel and experts were approved on a regular basis (usually at
four month intervals) so that everyone got paid, and we avoided any later
second-guessing as to fees or the work done.
Determination of Ponzi scheme conducted by XYZ.
The Receiver’s investigation concluded that
the purported “factoring” business conducted by XYZ was a cover for an
elaborate Ponzi scheme – an enterprise with no real business. Early
investors were paid only with funds received from later investors – the
classic Ponzi scheme. Eventually the pyramid collapsed, when there were
insufficient new funds to pay the ever-growing requirements to pay out
Mr. B’s Ultimate Flight to Canada.
The Receiver cooperated
with Federal law enforcement agencies, who were pursuing a criminal case
against Mr. B. This was not any secret – the Receiver reported on his own
cooperation in this regard in his periodic Interim Reports. Mr. B,
initially motivated to cooperate to obtain more favorable treatment by the
prosecuting authorities, turned over a significant amount of funds and
other assets. Mr. B’s cooperation, however, lasted only so long, and the
Receiver ultimately had to file a motion seeking to have Mr. B held in
contempt of court, which was granted. Mr. B was ordered to provide
cooperation or face imprisonment. He chose not to, and to the surprise of
all involved, he abandoned his wife and home, and fled to his native
Canada. Using a private investigator, the Receiver found Mr. B hiding in
Vancouver, resulting in the recovery of real and personal property assets
that Mr. B hid, acquired and/or took with him into Canada.
When Mr. B was
eventually arrested, the Vancouver Police seized significant assets,
including a suitcase full of a substantial amount of cash and three
computer flash drives. At the bail hearing, the Canadian judge ordered the
seized funds to be turned over to the Court, with $50,000 of the seized
funds held as a bail deposit. Mr. B was confined to his then current place
of residence and was required to surrender both his Canadian and United
Mr. B challenged the
seizure and turnover of assets and the flash drives in the Canadian court,
as well as the U.S. authorities’ attempts to extradite him to the U.S.,
but was unsuccessful, and the assets were turned over to the Receiver. Mr.
B filed various appeals of Canadian Court Orders against him on the
extradition issue up to the time of his death, in January 2015. At that
point, the money posted for Mr. B’s bail was turned over to the Receiver.
Asset Recovery for the Receivership Estate.
Through the seizure of bank accounts,
liquidation of physical assets, and recovery of monies improperly paid out
by XYZ, the Receiver’s efforts resulted in the capture of approximately
$19 million for the Receivership Estate.
Expansion of the Receivership Estate to
Include Mr. B and his wife.
One of the
first steps instrumental in the capture of significant additional assets
was the expansion of the Receivership to include Mr. B and his wife and
their personal assets. This allowed the Receiver to reach investor funds
improperly used by Mr. B and his wife, including real property and
accounts in Canada, and bond accounts held in Israel. Mr. B cooperated
initially in this regard, likely hoping to diminish exposure for
extended prison time and to obtain a stipend for his spouse. With Court
approval, the Receiver employed Canadian counsel to obtain a
“Recognition Order” establishing an ancillary receivership in Canada.
Recovery of Monies Paid to Mr. B’s Criminal
the source of a seven figure retainer paid by Mr. B to criminal defense
counsel, the Receiver established that monies obtained directly through
the Ponzi scheme had been used to pay that retainer and were subject to
disgorgement by the counsel because they came directly from investor
dollars. After negotiations, the Receiver recovered most of those funds,
and importantly, criminal defense counsel waived any and all claims as a
creditor in the Receivership Estate, thus freeing up those funds for
payment to investors.
Liquidation of Real Estate.
Various parcels of real property that were
ultimately sold by the Receiver. Two of the properties were condominium
units, which led to monthly expenses pending sale to the detriment of
the receiver’s bottom line. Eventually, the Receiver was required to
take action in order to obtain possession of one of the units from Mr.
B’s spouse, who did not vacate as promised.
Through his investigation after Mr. B fled to
Canada, the Receiver also found and took possession of a luxury
condominium owned by Mr. B in Canada. Mr. B was in escrow to sell the
condominium at the time the Receiver located it, but the Receiver’s
Canadian counsel intervened the very week escrow was to close, and
obtained the proceeds for the Receivership Estate.
Fraudulent Transfer (“Winner”) Cases against XYZ Investors.
A very significant part of the Receivership
activities related to litigation brought by the Receiver against those
individuals identified as “winners” of XYZ. In very general terms,
“winners” are those individuals who received greater returns from XYZ
than the amounts they “invested.” The Receiver sought recovery of these
excess amounts through “clawback” lawsuits.
The Order was again expanded to authorize the
Receiver to commence litigation to recover the fraudulent transfers if
necessary. The Receiver sent out demand letters and negotiated
settlements with many of these “winners.” As to those “winners” with
whom a settlement could not be reached in a timely manner, the Receiver
initiated clawback lawsuits. There were a total of 58 lawsuits filed by
the Receiver against winners, all of which were either settled or
resulted in default judgments entered against named defendants. The
settlements and judgment recoveries created a significant net benefit
for the Estate.
We knew after the
reconstruction of records that (a) there would be a dispute as to claims
made by investors and others; and (b) that there would very likely not be
sufficient funds to pay all claims. After obtaining early Court approval
for a “claims procedure” to determine valid claims from those damaged by
XYZ, the Receiver sent out claims packages to investors and other known
creditors. The packages included a cover letter from the Receiver, a
Notice of Bar Date, a Receiver’s Distribution Plan, and Claim Form. The
Receiver also advertised in newspapers of general circulation, and posted
the claim information, instructions and forms on his website.
The Receiver evaluated
and processed the approximately 270 claims submitted which totaled more
than $44 million. The Receiver filed a Motion for Order Approving
Receiver’s Proposed Acceptance, Rejection and Responses to Claims, and
Authorizing Interim Distribution of Receivership Funds to Approved
Claimants. The Claims Motion described how the Receiver had processed the
numerous claims, and reached agreement (or a lack of objection) as to his
treatment of all except for fourteen of the approximately 270 claims.
After a lengthy hearing, the Court entered its Order on the Claims Motion,
approving claims totaling approximately $27 million.
Early in the case, the Receiver made several
interim distributions of Receivership Estate funds to investors with
claims approved by the Court. Upon approval of the Motion to Approve Final
Account, the Receiver made a final distribution, bringing the total
distribution to almost $16 million. The total amount distributed was
almost 60% of the approved claims. Once all known assets were collected
and distributed, it was time to wrap up the case.
What is to be learned from this saga? First,
is that it is immensely satisfying to seek recoveries on behalf of
defrauded investors. Second, is that tactical maneuvers and speed of
execution are paramount in seeking to achieve a beneficial result, while
organization of facts and documents may be almost as important. Third, is
the not-surprising moral of the story – constant communication with the
Court, counsel and interested parties will create allies and supporters,
rather than alienated victims. Should you be fortunate enough to become
enmeshed in a multi-faceted and challenging situation such as this, I wish
you the best.
*Alan M. Mirman is a partner in the
Woodland Hills law firm of Mirman, Bubman & Nahmias, LLP, and specializes
in creditor’s rights. His practice includes provisional remedies,
representation of receivers, litigation, loan and lease documentation, and