You Can't Cheat an Honest Man - James Walsh [130]
1. For more on Colonial Realty see Chapter 12.
lently issuing memoranda to induce individuals to invest in bogus limited partnerships.
The bulk of the receiver’s complaint alleged a scheme to defraud investors; but the only alleged damage to the Ponzi company was the generation of some unpaid accounting bills. The accused accounting firm argued that the receiver lacked legal standing because the claims “really” belonged to the scheme’s investors and that any claims the companies might make were prohibited by virtue of their own participation in the fraudulent scheme.
The court ruled that the receiver hadn’t alleged any distinct way in which the companies were damaged by the wrongdoing of the CPAs. It dismissed the claims and went on to explain that, because the receiver had alleged that the injury to the companies was coextensive with the injury to the investors, “the trustee has done no more than cast the [companies] as collection agents for the [investors].”
If—as the court suspected—the facts of the complaint suggested that the claims actually belonged to the investors, “a blanket allegation of damage to the debtors will not confer standing on the [receiver].” (The investors had already filed separate lawsuits against the law and accounting firms.)
The appeals court, affirming the lower court ruling, noted that the claim against the accounting firm relied on the distribution of misleading memoranda to investors. So, only the individual limited partners could make the claims against Andersen.
Unfortunately, there are exceptions that confuse matters by suggesting that a receiver can sometimes go after professionals on behalf of investors. The 1988 federal appeals court decision Regan v. Vinick & Young offered an example. In the case, a Ponzi scheme bought and sold rare coins for its customers—but the principals stole significant assets from the company, which eventually led to its collapse.
A court-appointed trustee sued the company’s accountant and auditor for certifying reports which summarized rare coin transactions. His complaint alleged negligence, breach of contract, negligent misrepresentation, and unfair and deceptive acts or practices. The damages sought included: the cost of the accountant’s services, the misappropriation of assets by the company’s principals, certain sales commissions paid by the company, the costs of its bankruptcy filing and an $11.8 million fine from the FTC.
The accountants argued that the claims filed by the trustee belonged only to investors, a group the trustee did not represent. The court disagreed, ruling:
The trustee steps into the shoes of the [failed company] for the purposes of asserting or maintaining its causes of action, which become property of the estate. [Any] confusion may stem from the trustee’s repeated assertions that the accountant’s wrongdoing caused [investors] to lose money. This emphasis... appears to result from the $11.8 million claim filed on their behalf... and from the concern that the estate may be held jointly and severally liable with the accountant in any eventual actions.
So, these concerns were legitimate. The trustee could go after the accountants. If he won, the money would go into the company’s bankruptcy estate and—all would hope—eventually to the investors.
Lawyers and accountants can’t just take money from Ponzi perps without asking any questions about its origins. As one federal court has written:
The court’s ruling in no way condones the acts of an attorney who blindly handles substantial sums of money for a client with no inquiry into its source if the attorney has reason to suspect the legality of the origins of the funds or if the attorney has reason to suspect his or her client’s right to ownership of those funds. The attorney is clearly subject to disciplinary sanctions according to