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Recovering the excess from net winners in a Ponzi scheme

Ponzi schemes are fraudulent investment schemes whereby individuals are enticed by a conman or fraudster to make investments in an operation promising an unreasonably high rate of return. Once the first few investments are made, subsequent investors are enticed to invest partly through reported gains and partly through the high payouts of earlier investors. Ultimately, the conman either spends or disappears with the remaining money, or the scheme collapses on itself as funds are exhausted by payouts to earlier investors. 

Titan Investments Ltd. Partnership (Re), 2005 ABQB 637 

There will be "winners" in the Ponzi scheme - those who recovered some or their entire initial "investment"; and "losers" - those who recover little or nothing. When the perpetrator of the scheme is bankrupted, a trustee in bankruptcy may be able to recover excess payments from net winners for the benefit of the creditor body of net losers. Such was the case in Boale, Wood & Company Ltd. v. Whitmore, 2017 BCSC 1917.

Rashida Samji, through a Ponzi scheme, raised some $110 million over seven years. To keep the scheme alive, she paid out some $99.5 million to her "investors". One of those investors was Kay Whitmore, a former NHL goalie.

Whitmore was a net winner. Over the period of his dealings with Samji, he invested or reinvested a total of $605,000. He received payments, both of principal and "fees", totalling $989,000. Accordingly, he became a net winner of $384,000 over his principal investment - the profit, which throughout the decision was referred to as the "excess".

Samji's trustee in bankruptcy, Boale, Wood & Company Ltd. (the "trustee") commenced action to recover the excess (but not the principal even though that amount would only be available for repayment due to the investment of later investors). The trustee alleged that the payment of the excess:

  • Was void as a fraudulent conveyance, contrary to the Fraudulent Conveyance Act;
  • Was void as a fraudulent preference, contrary to the Fraudulent Preference Act;
  • Was an unjust enrichment of Whitmore; and,
  • Constituted money had and received.

The court found the trustee was entitled to recover the excess on each basis other than that the payments were a fraudulent preference.

Fraudulent conveyance

The essential element for a fraudulent conveyance is that there must be a disposition of property designed to "delay, hinder or defraud creditors and others of their just and lawful remedies". There may be a defence if the disposition is "for good consideration and in good faith lawfully transferred to a person who, at the time of the transfer, has no notice or knowledge of collusion or fraud."

The court made several key findings in coming to the conclusion that the payment of the Excess to Whitmore was a fraudulent conveyance:

  • "a Ponzi scheme is insolvent from its inception";
  • "an intention to defraud creditors may be inferred from that fact that a debtor is operating a Ponzi scheme, as no other reasonable inference is possible";
  • "the Excess constitutes a 'disposition of property'";
  • "the perpetrator of a Ponzi scheme does not receive 'reasonably equivalent value' or 'good consideration' for payments made to investors that are in excess of the investors' capital investment. That is because there is no provision of "value" in exchange for "profit" in a Ponzi scheme. Likewise, the recipient of the fictitious profits provides no consideration";
  • "the Excess was not 'lawfully transferred' to the defendant ... it was transferred to him as part of the unlawful Scheme being perpetrated by Samji".

Such findings, which focus on the nature of a Ponzi scheme more than the individual relationship of the scheme's operator and the victim, may make it nearly impossible for most net winners to avoid liability for the excess based on a fraudulent conveyance. They may then be obliged to pay into the pool for the benefit of the net losers. Good news for net losers in a Ponzi scheme!

Fraudulent preference

Whitmore avoided liability under the Fraudulent Preference Act, on the basis that the court found there was no intention by Whitmore that he should receive a preference over other creditors. In another situation, a proactive investor who aggressively seeks repayment knowing that there are other investors who are not being paid might not be so successful in defending a fraudulent preference claim.

Unjust Enrichment

The elements of an unjust enrichment are:

  • An enrichment on the part of the defendant;
  • A corresponding deprivation on the part of the plaintiff; and,
  • The absence of a juristic reason for the enrichment.

The court had no difficulty in finding that Whitmore was enriched. Equally, the court found the enrichment occurred because other people had invested who the trustee, as plaintiff, effectively represented.

If Whitmore had not been paid, there could have been more funds available for net losers. Relying on the findings related to the nature of a Ponzi scheme, the court concluded that there could be no juristic reason for the enrichment of one investor over others. Ultimately the court concluded that:

"In the context of a Ponzi fraud, the law of unjust enrichment requires the return of Ponzi profits, regardless of the innocence of the recipient ... It would particularly be contrary to public policy to allow a retention of the profits in this case, given that they were not real returns on the defendant's investment but rather artificial transfers from other creditors of Samji designed to further Samji's fraud. In my view, despite the defendant's innocence with respect to the Scheme, equity requires that he not be permitted to benefit from Samji's fraud at the expense of the Net Losers who were not as lucky as the defendant."

Money had and received

This type of claim is usually made in the context of a payment made by mistake. However, the court found the law was not so limited and that "the cause of action arises where money has been received in circumstances where it would be unjust for the recipient to keep it." Whitmore's payments were made from monies "invested by others for the purpose of creating the appearance of a profitable business venture in order to perpetuate the fraud." Accordingly, it was not just for Whitmore to retain the excess.

In some cases where there is a claim for money had and received, a defendant may be able to argue there was change in position upon receipt of the payment. Whitmore was unsuccessful in this argument. It may seldom, if ever, be available for a net winner in a Ponzi scheme as the court noted that: "Canadian courts have held that the defence of change of position in inapplicable to over-paid investors in a Ponzi scheme."

Conclusion

The lessons from Boale, Wood & Company Ltd. v. Whitmore are that:

  • Net winners in a Ponzi scheme, regardless of their innocence, may be obligated to repay "profits" to a trustee in bankruptcy or to the net losers in a class action or other proceeding;
  • Net losers in such schemes, may have some chance for recovery of a portion of their investments;
  • If an investment seems too good to be true, it probably is! 

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