You Can't Cheat an Honest Man - James Walsh [144]
The gist of Shain’s complaint was that “Duff & Phelps actively foisted a uniform and consistent set of misrepresentations and omissions on the Duff & Phelps Class via the Class Brokers who reiterated them to, or relied on them for, the Class.”
Beginning in or about July 1990, “in an effort to lend additional credibility and respectability to its operations, Towers [Financial] hired Duff & Phelps to rate the Towers Bonds.” According to Shain, the relationship between Towers Financial and Duff & Phelps soon became “symbiotic.” Towers paid Duff & Phelps fees and Duff & Phelps helped Towers promote itself to the investment community.
Duff & Phelps had never directly solicited Shain or other individual investors. Instead, Shain argued, the firm had “solicited” the sale of Towers notes to the investors by communicating with brokers.
The court ruled that Shain’s theory that Duff & Phelps “solicited” investors through brokers was too convoluted to work. It wrote: “the district court decisions in this circuit consistently have held that persons are not liable...for solicitation unless they directly or personally solicit the buyer.”
In April 1995, Hoffenberg pleaded guilty to running an investment scam, fraudulently selling notes and bonds to investors and using some of the proceeds to pay interest owed earlier investors. A year later, he asked to withdraw his guilty plea because he had been suffering from mental illness. A federal judge ordered psychiatric tests.
In March 1997, Hoffenberg was sentenced to 20 years in prison. District Judge Robert Sweet also ordered him to pay $463 million in restitution and a fine of $1 million. “There has been tremendous suffering here,” Sweet told Hoffenberg. “You have not accepted responsibility for these securities frauds.”
Hoffenberg said he would appeal.
CHAPTER 22
Chapter 22: Fight Like Hell in Bankruptcy Court
All Ponzi schemes eventually collapse. After a scheme has ground to its inevitable conclusion, filing for bankruptcy protection—sometimes voluntarily, but usually court-ordered—is all that’s left.
In order to get anything out of the bankruptcy process, a burned Ponzi investor has to fight like hell at each of several stages. This will usually require lawyers, various kinds of professional fees and enough fellow burned investors or creditors to raise a collective voice.
Even though the effort is complex and expensive, it can be worth the effort. And you don’t have to be a lawyer to make the decision whether you should fight or—within some limits—how. You only need to know a few basic points about how Ponzi schemes work their way through bankruptcy proceedings.
To start, federal appeals court judge Richard Posner has written:
Corporate bankruptcy proceedings are not famous for expedition.... So, the last resort for the burned Ponzi investor is to look for some restitution in bankruptcy court. The law treats Ponzi investors a little better than shareholders of a legitimate company when it comes to court-ordered liquidation...but only a little better.
A more important distinction is the one between a Ponzi investor and a creditor of a Ponzi company. Sometimes there isn’much of one. In its 1924 decision Cunningham v. Brown—which involved Carlo Ponzi’s original scam—the U.S. Supreme Court wrote that a “defrauded lender becomes merely a creditor to the extent of his loss and a payment to him by the bankrupt within the prescribed period...is a preference.”
What’s more: the Bankruptcy Code allows a court to consider any transaction which occurs within the last 90 days before a filing inherently preferential—simply because of the time at which it took place. This protects “those investors who transfer monies to the scheme within the ninety day pre-petition period who receive nothing in return due to the collapse of the scheme, yet whose funds are used to pay earlier investors.”
Bankrupcty law discourages creditors “from racing to the courthouse