Recovering Losses From a Ponzi Scheme: Receivers, Clawbacks and Claims

What happens first: the enforcement case and the receiver

A Ponzi scheme usually ends when the SEC, the Texas State Securities Board or a prosecutor steps in. In an SEC case, the court may grant any equitable relief appropriate for the benefit of investors under 15 U.S.C. § 78u(d)(5), and the standard relief is a freeze of the operator's assets and the appointment of a receiver. The receiver takes control of the entities, bank accounts and property, investigates where the money went, and reports to the court. If the operator files bankruptcy instead, a trustee performs the same role under the Bankruptcy Code.

For an individual investor the receivership changes two things. Litigation against the operator and the receivership entities is typically stayed, so you cannot race to the courthouse and collect first. And your recovery from the estate comes through the receiver's claims process, not a private judgment. The receiver's website and court filings become the main source of information, and the proof-of-claim deadline is the first date to put on the calendar.

How the claims process divides the money

Receivers propose, and courts approve, a distribution plan. The usual rule is the net investment method: each investor's claim is what she paid in minus what she took out, and the available assets are paid pro rata on those net claims. An investor who withdrew more than she invested has no claim and may face a clawback. Interest, promised returns and account statements showing fictitious balances are not honored, because the balances never existed. Distributions come in stages over years as the receiver sells assets and settles litigation.

Clawbacks under the Texas Uniform Fraudulent Transfer Act

The receiver's most powerful tool is the Texas Uniform Fraudulent Transfer Act, Texas Business and Commerce Code chapter 24. Under section 24.005(a)(1), a transfer made with actual intent to hinder, delay or defraud creditors is voidable, and section 24.008 lets the creditor (here, the receiver standing in the shoes of the defrauded entities) recover the asset or its value from the transferee. Federal courts in Texas have treated proof that the transferor operated a Ponzi scheme as establishing that intent for the scheme's payments to investors, so the receiver does not have to prove intent payment by payment.

The transferee's defense is in section 24.009(a): the transfer is not voidable against a person who took in good faith and for a reasonably equivalent value. Returned principal is commonly treated as given for value, because the investor had a claim for that amount; fictitious profits are not, because nothing was given for them. Good faith is lost when the investor knew of the fraud or was on notice of facts that should have prompted inquiry. The deadline for an actual-fraud clawback under section 24.010 is four years after the transfer or, if later, one year after the transfer was or reasonably could have been discovered by the claimant. In the Stanford receivership, the Fifth Circuit applied that discovery rule to the receiver's claims in Janvey v. Romero (5th Cir. 2016).

Example

Suppose a Fort Worth dentist invested $300,000 in a "factoring fund" run from an office in Las Colinas, received $420,000 in monthly "returns" over four years, and then the fund collapsed and a receiver was appointed. She is a net winner by $120,000. The receiver demands that amount under section 24.005(a)(1), relying on the Ponzi presumption. Her defense is section 24.009(a): she took in good faith, and the first $300,000 was return of her principal, for which she gave value. If the court agrees, she keeps the $300,000 and returns the $120,000 of fictitious profit. If the receiver can show she ignored clear warning signs, she may lose the good-faith defense for everything.

Suing the people who sold or aided the scheme

The operator is usually in prison or insolvent, so real recovery often depends on others. Three groups are the usual defendants.

• Sellers and finders. Anyone who sold the investment is a "seller" under the Texas Securities Act. Texas Government Code section 4008.052 makes a seller liable for a sale by untrue statement without proof of intent, and section 4008.051 for a sale without registration or by an unregistered dealer or agent. Commissioned salesmen in a Ponzi scheme are almost always unregistered, which gives a rescission claim that needs no misstatement at all.
• Control persons and material aiders. Under section 4008.055, a person who controlled the seller is jointly liable unless it proves it could not have known the facts, and a person who materially aided the sale with intent to deceive or with reckless disregard is liable too. Promoters, marketing affiliates and sometimes professionals fall here. The standard for aiders is explained in the guide to control-person and aider liability.
• Firms and institutions. A brokerage firm whose broker sold the scheme away from the firm, a bank that processed the accounts, or an accounting firm that issued reports can face claims, but only on specific facts showing knowledge or reckless disregard; negligence alone is rarely enough for aider liability. These are the hardest cases and the most valuable ones.

Common-law fraud, breach of fiduciary duty, civil conspiracy and the Texas Theft Liability Act often accompany the securities claims, and constructive trust and tracing can reach specific assets bought with investor money.

Your own suit or the receiver's

The receiver sues on behalf of the entities, not on behalf of individual investors, and courts often bar investors from pursuing claims that belong to the estate. Claims that are personal to you, such as a misrepresentation made to you by the salesman who sold you the deal, generally remain yours. Coordination matters: a receiver's settlement with a bank or brokerage may include a bar order that extinguishes investor claims against that defendant in exchange for a payment into the estate. Watch the docket for proposed settlements and objection deadlines, and get advice before any deadline passes rather than after.

Deadlines to watch

• Proof of claim. Set by the receivership court; missing it can forfeit your share.
• Texas Securities Act. Three years from discovery and no more than five years from the sale for misstatement claims; three years from the sale for registration claims (section 4008.062).
• Fraud and fiduciary duty. Four years under Civil Practice and Remedies Code section 16.004, with discovery-rule arguments.
• Federal securities fraud. Two years from discovery, five years from the violation (28 U.S.C. § 1658(b)).
• Clawbacks against you. Four years from the payment, or one year from when the receiver discovered or could have discovered it (section 24.010).

The comparison of state and federal periods is in the securities deadlines guide.

What to do now

Collect every record of money in and money out, including wire confirmations and the scheme's account statements, and keep them unaltered. File the proof of claim on time. Do not sign a release or accept a "settlement" from the operator's associates without advice. If a clawback demand arrives, respond through counsel, because the good-faith defense is won or lost on what you knew and when. And have a litigator review the sales chain early, since the third-party claims carry the shortest useful deadlines and the best prospect of real recovery. Tina Wysk represents investors, receivers' targets and third parties in Ponzi-related litigation in Dallas state and federal courts; see securities and investment disputes.