You Can't Cheat an Honest Man - James Walsh [124]
To sum up their argument, they asked the following question: How can allegedly fraudulent conveyances hurt the instrument—namely, the company—through which the Ponzi scheme was operated?
Judge Richard Posner provided the following answer:
The corporations, [the perp’s] robotic tools, were nevertheless ...separate legal entities with rights and duties. They received money from unsuspecting, if perhaps greedy and foolish, investors. That money should have been used for the stated purpose..., which was to trade commodities.... The three sets of transfers removed assets from the corporations for an unauthorized purpose and by doing so injured the corporations. Thus, it is the removal of assets that damaged the debtor, and the trustee has standing to sue for this type of injury.
So, the people who’d received money from the scheme could be forced to give it back.
In vivid language, Posner went on to explain: The appointment of the receiver removed the wrongdoer from the scene. The corporations were no longer the perp’s evil zombies. Freed from his spell they became entitled to the return of the money—for the benefit of the unsuspecting investors—that the perp had made the corporations divert for unauthorized purposes.
Civil RICO Claims
Because Ponzi schemes follow patterns of fraud and theft, many angry investors pursuing perps will try to press lawsuits which cite the Racketeer and Corrupt Organizations Act of 1970 (RICO). These can get very complicated.
A RICO claim must include seven constituent elements, namely:
1) that the defendant 2) through the commission of two or more acts 3) constituting a “pattern” 4) of “racketeering activity” 5) directly or indirectly...participates in 6) an “enterprise” 7) the activities of which affect interstate or foreign commerce.
One strength of a RICO claim is that it allows triple damages; one problem is that it can be tough to make. When investors allege predicate acts of fraud as the basis of their RICO complaint (which is always so in Ponzi scheme cases), they must plead injury and causation with particularity. This means the person making the claim has to show a direct causal link between his injury and specific acts of mail or wire fraud. To state a claim of mail fraud or wire fraud, a complaint must allege:
1) a scheme or artifice to defraud or to obtain money by means of false pretenses, representations, or promises;
2) use of the mail for the purpose of executing the scheme; and
3) a specific intent to defraud either by devising, participating in, or abetting the scheme.
And then, these charges have to be linked back to specific losses suffered by the people making the RICO claim.
Another difficulty in making a civil RICO claim is that the person doing so has to have exhausted other avenues of recouping lost investments. A federal court in New York put this point plainly:
a plaintiff who claims that a debt is uncollectible because of the defendant’s conduct can only pursue the RICO treble damages remedy after his contractual rights to payment have been frustrated....Until plaintiffs can demonstrate that the orthodox methods of recovery have failed them, and that defendants’ acts of racketeering have in fact caused them a loss, they should not be entitled to treble damages under RICO.
Finally, a loss claimed in a civil RICO suit can’t be speculative in nature. It must be definable on a factual basis—even if only approximately definable.
Burned Investors vs. Angry Creditors
When burned investors try to get their money back from other investors who got their money out, some pretty arcane parts of the law come into play. Chief among these: Passage of title.
In legal terms, a sale is defined as the “passing of title from the seller to the buyer for a price.” The passing of title to goods cannot occur before