Restitution Discussion Group Archives
| Sender: |
Martin Laforet |
| Date: |
Wed, 19 Jan 2005 06:25:01 -0500 |
| Re: |
Ponzi scheme |
At
06:46 PM 7/29/2004 -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 threaten legal action (constructive trust
resulting in unjust enrichment) 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 (in the laws of unjust enrichment through
the trustee in bankruptcy) to money paid out to investors who profited
by taking more than their original investment out of the phoney company.
Regards, Mark
From: Lionel Smith 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.
Sorry that I didn't get back to you sooner on this as
I had hoped. In answer to your questions I feel that I have left too much
out so I will expand on the details of this case:
The bankrupt's business was a sole proprietorship which
as a business consisted of obtaining money from more than 800 people purporting
to invest the sums in the stock market and other enterprises and then
paying back the investors on their investments after deducting fees. The
bankrupt was technical in a fiduciary relationship with all of the investors
as she had total control of the money which they had deposited with her
(she issued account opening statements with investment agreements). The
bankrupt did not segregate investor's money from her own money nor did
she segregate investor's monies from each other. The bankrupt did place
some of the money entrusted to her in the investment firms of Nesbitt
Burns and Glendale securities. However, it was later revealed that neither
of these firms made payment of funds of profit to the bankrupt. The bankrupt
eventually plead to seven offenses under the Criminal Code of Canada.
The bankrupt further confessed that she did not receive any payment of
funds from investment firms but rather that funds received from later
investors were used to satisfy earning and dividends promised to earlier
investors. It was determined that a large portion of the monies received
by the bankrupt was never invested but was converted for personal use
and benefit of herself. The bankrupt lured persons to invest by issuing
fictitious account reports to her investment clients and a number of clients
received their money back and in some cases profited handsomely. These
handsome profits caused word of her investment prowess to spread resulting
in additional investors.
The trustee in bankruptcy is of the opinion:
That the payments made to those who profited handsomely,
is subject to a constructive trust wherein the recipients of the money
holds the funds in trust for the trustee.
That monies paid to investors who profited came solely
from funds paid by other investors to the bankrupt and as such should
be repaid by an Order of restitution.
In the end some of the proceeds are traceable while some
are more difficult.
Hope this expansion answers your questions
Mark
Sent: Tuesday, July 29, 2004 8:16 PM
Subject: Re: [RDG:] Ponzi scheme
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