You Can't Cheat an Honest Man - James Walsh [129]
The appeals board upheld the bankruptcy court’s decision in favor of the dealers. The trustee would have to look elsewhere for deep pockets. It concluded:
None of the transfers are avoidable under the Uniform Fraudulent Transfer Act because the dealers took Cohen’s money in good faith for reasonably equivalent value. Although some of the transfers are avoidable under Bankruptcy Code, the dealers qualify for the safe harbor demarked by good faith and value given to the debtor and are entitled to retain the money they received.
Long story short: Cohen may have been stealing money from some of the scheme participants; but that didn’t mean the trustee could go after the dealers. They had operated in good faith. And they were probably the only characters in the story who had.
CHAPTER 20
Chapter 20: Go After the Lawyers and Accountants
Trusting someone who turned out to be a smarmy crook is bad enough. What’s even worse is realizing that a bunch of smarmy lawyers and CPAs ran up big fees advising the crooks, got paid and then claimed that they didn’t know what was going on the whole time.
This is why the second lawsuit filed by most burned Ponzi investors is against any yuppie scum who advised in the scam. Even though it’s usually the second suit filed, it’s usually the most successful. Why? Lawyers and CPAs usually have professional liability insurance.
In March 1993, a top-notch law firm found itself in legal hot water over work it did for Stockbridge Funding Corp., the New York mortgage-brokerage business that turned out to be a Ponzi scheme preying on Eastern European immigrants.
Court-appointed trustee David Kittay who was charged with liquidating what was left of Stockbridge claimed that New York-based Battle Fowler, the law firm which had advised Stockbridge’s management during its thieving heyday, should be held responsible for the ment during its thieving heyday, should be held responsible for the lawyer firm “aided and abetted” the fraud by “drafting, editing and supervising illegal and fraudulent advertising” placed in newspapers geared toward Eastern European immigrants.
Battle Fowler answered that it had been unaware of any wrongdoing. Spokesmen for the law firm said it had tried to ensure that Stockbridge abided by the law—but that its efforts had been sabotaged by Stockbridge’s owners. “There’s not a scintilla of evidence that any of the lawyers at Battle Fowler knew what these characters were doing. They didn’t know what these crooks were doing any more than anyone else [did],” the lawyers’ lawyer said.
Battle Fowler’s attorney said Kittay’s suit was a creative—but unjustifiable—attempt to search for deep pockets to repay investors. If anything, he said, Stockbridge owed Battle Fowler money. The law firm had only been paid $50,000 for the legal work it did; it was still owed another $40,000.
Apparently, Battle Fowler went too far in fighting Kittay’s claim. In an order, the judge presiding over the early stages of the dispute rebuked Battle Fowler’s lawyers for attempting to “terrorize” immigrant investors by sending out notices demanding that they bring immigration documents with them for pretrial questioning.
The pushy approach didn’t work. Battle Fowler ended up settling with Kittay in exchange for a quiet end to the suit.
The RICO Connection
Generally, the legal rule is that companies that were part of Ponzi schemes can’t sue under RICO. Only investors can. However, this leads to an inherent conflict: the receiver’s primary responsibility is to the corporation—not the burned investors.
This means that receivers aren’t usually good advocates for what most people would consider justice in the wake of a Ponzi scheme. Their proper role is to liquidate whatever assets are left as quickly and costeffectively as possible.
The 1995 federal appeals court decision Hirsch v. Arthur Andersen & Co. illustrates why receivers in Ponzi cases have so much trouble going after lawyers and accountants.
In Hirsch (which