Have I Got a Deal for You!
Recovering Assets from Ponzi Schemes
by Robert C. Furr
Furr & Cohen, PA; Boca Raton, Fla.
Marc Barmat
Furr & Cohen, PA; Boca Raton, Fla.
A Ponzi scheme is an arrangement whereby an enterprise makes payments to investors from the proceeds of a later investment rather than from profits of the underlying business venture as the investors expected. The fraud consists of transferring the proceeds received from a new investor to previous investors, thereby giving other investors the impression that a legitimate profit-making business opportunity exists, where in fact no such opportunity exists. Hayes v. Palm Seedlings Partners-A (In re Agricultural Research and Technology Group Inc.), 916 F.2d 548, 531 (9th Cir. 1990). In a Ponzi scheme, the enterprise operates and continues to operate at a loss. The enterprise gives the appearance of being profitable, however, the effect of the scheme is to put the enterprise farther and farther into debt by incurring more and more liability. Hirsch v. Arthur Andersen & Co., 72 F.3d 1085 (2d Cir. 1995). At the appropriate time, the Ponzi perpetrator typically absconds with the outstanding investments. As one author describes it, “he borrowed from Peter to pay Paul. And it worked … until Paul got wise.” United States v. Cook, 573 F.2d 281, 282 n.3 (5th Cir.) (quoting unnamed author), cert. denied, 439 U.S. 836 (1978).
Eleventh Circuit Adopts Xonics Approach to Discount Contingent Liabilities for Insolvency Determination in Fraudulent Transfer Litigation
by Irving E. Walker
Saul Ewing LLP; Baltimore
Gary H. Leibowitz
Saul Ewing LLP; Baltimore
In Advanced Telecommunication Network Inc. v. Allen (In re Advanced Telecommunication Network Inc.), 490 F.3d 1325 (11th Cir. 2007), the U.S. Court of Appeals for the Eleventh Circuit adopted the approach set forth by the Seventh Circuit Court of Appeals in In re Xonics Photochemical, 841 F.2d 198, 200 (7th Cir. 1988), to reduce a contingent liability to its present, or expected, value in order to determine whether a debtor was insolvent on a given date.
Bankruptcy court judges are often faced with the daunting task of discarding their Bankruptcy Code in favor of a calculator in order to determine the pre-petition solvency of a debtor in the context of fraudulent-transfer litigation. The solvency analysis is often complicated by the need to attribute value to contingent assets and liabilities. In its 1988 decision in Xonics, the Seventh Circuit Court of Appeals recognized the need to discount the value of contingent liabilities by the probability that such contingency will actually occur, and stated that the asset or liability determination must be reduced to its present or expected value before a determination can be made on whether the debtor’s assets exceed liabilities. Xonics, 841 F.2d at 200. In reversing the decisions of the Florida Bankruptcy and District Courts, the Eleventh Circuit has now expressly adopted this method of discounting.
Is the Good News for Securities Fraud Secondary Liability Defendants Really the Bad News?
by Wayne Greenwald
Wayne Greenwald, PC; New York
Unlike Vegas, what happens in bankruptcy court does not necessarily stay in bankruptcy court. The ripples born of Enron’s and its affiliates’ chapter 11 filings are still reverberating in nonbankruptcy courts. The recent decision in Regents of the Univ. of Calif. v. Credit Suisse First Boston (USA) Inc., 482 F.3d 372 (5th Cir. 2007) (“Regents”), adds a new perspective on secondary liability in securities fraud cases.
The court of appeals, on an interlocutory appeal, addressed whether the U.S. District Court for the Southern District of Texas improperly granted class certification to a putative class action against banks that engaged in a series of transactions with Enron Corp. The transactions allowed Enron to take liabilities off of its books temporarily and to book revenue from the transactions when Enron was actually incurring debt. These transactions allowed Enron to misstate its financial condition, which inflated its stock price. There was no allegation that the banks were fiduciaries to the plaintiffs, that they improperly filed financial reports for Enron or engaged in manipulative activities directly in the market for Enron securities.
Winter Leadership Conference Agenda
The Commercial Fraud Task Force and Bankruptcy Litigation Committee will join forces at ABI’s 2007 Winter Leadership Conference at the Westin Mission Hills Resort & Spa in Rancho Mirage, Calif., to present “Gotcha! Replacing Management for Fraud and Other Evil Deeds.” The joint meeting will take place on Friday, Dec. 11, from 9:30-11:00 a.m.
Overview:
Under §1104, an evidentiary burden must be met to oust management on issues of fraud, dishonesty, incompetence or gross mismanagement. Most frauds go unnoticed in private companies, and public companies have not exactly been fast to eliminate members of the debtor’s rat pack. Attend this session and obtain the information you need to expose the “Seven Deadly Sins” and win the appointment of trustee or examiner. This will be followed by “20 Questions for Management of the Debtor at the 341 When Fraud and Other Evil Deeds Are Suspected.”
Panel:
Deirdre A. Martini – CIT Group Inc.; New York
Cyrus Noshir Pardiwala – PricewaterhouseCoopers LLP; New York
Hon. Barry Russell – U.S. Bankruptcy Court (C.D. Calif.); Los Angeles
Jordon W. Siev - Anderson, Kill & Olick; New York
Brian C. Walsh – Bryan Cave LLP; St. Louis