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These cases are fiendishly complicated. You implicate at least the following issues:

-when a later investor is paid out of funds in the hands of the fraudster, are those funds traceable proceeds of the investments of an earlier investor(s)?

-if so, does the earlier investor have a debtor-creditor or trustee-beneficiary relationship with the fraudster? a question of fact, which in turn may lead to an issue whether a fraudulently induced contract has been avoided, and if so, when;

-assuming an earlier investor shows a trust and can trace to the payment to the later investor, nonetheless can the later investor show that s/he was a good faith purchaser of a legal interest for value without notice? although 'value' for this defence must be 'new value', still the present discharge of an antecedent debt IS new value, a subtle distinction which can keep one up at night;

-but even if not, can the trustee show that the payment to the later investor was a fraudulent/voidable preference? and if so, who benefits? seemingly, NOT any trust beneficiary who can trace to that payment, but all unsecured creditors.

Few of the reported cases are impressively argued and reasoned. These cases are best settled by agreement because the professional costs in litigating all those issues to resolution will devour the assets remaining. There is some discussion of this at the very end of the Law of Tracing (1997) but it ends rather suddenly as it all got too difficult for me.

There is probably a long article or a book in it.

Lionel

At 06:46 PM 7/29/2003 -0400, Martin Laforet wrote:

Here is a case that we could debate and discuss. It concerns a unlicensed person who took in a total of three million dollars from investors and deposited it all in a central bank account. In return she would issue statements as she was supposedly buying and selling stocks for these investors. At the same time she was writing cheques out of the same account to pay other people off who decided to withdraw some of their supposed profits. The whole thing lasted approximately three years until all assets were frozen by the OSC. All of this occurred approximately eight years ago. In the end the mastermind behind this scheme went to prison for three months. It was determined that, other then some silver and gold certificates, no securities were ever purchased. None of her inside people were ever convicted of any crime even though they knew what was going on at the time. There were a few unsuspecting investors who were encouraged to go out and invite other people to invest in the scheme as well but none of these people were ever convicted of any wrongdoing either. The trustee in bankruptcy was able to recuperate approximately one million dollars initially. The trustee also set out to threaten legal action against all of those who collected more money then they had originally invested. The problem is that the accounting was a nightmare and it is difficult to trace some of the funds so the trustee in bankruptcy is still not exactly sure who owes what after eight years. The question is that after all of this time do the investors who lost money have any claim (through the trustee in bankruptcy) to money paid out to investors who profited by taking more than their original investment out of the phony company.