Amid the financial catastrophe that persists in the United States today, one of the most damaging contributors unmasked is the array of fraudulent investment scams that have appeared in federal courts. Although some justice is seen as fraudsters such as Bernard Madoff and R. Allen Stanford sit in prison, such a consequence does not resolve the devastating financial loss that individuals and charitable organizations have suffered as a result of such schemes.
Upon the collapse of such a criminal plot, the court often appoints a trustee to liquidate the conspirator’s estate and recover as much of the phony investment as possible for purposes of equitable distribution among innocent investors. As one theorist put it, the fantasy that the trustee will locate colossal bank accounts in the Caymans to fully compensate victims is generally replaced by the stunning actuality that “the elusive ‘pot of gold’ is in the pockets of the innocent victims who invested with the schemer.” Consequently, compensation often involves the “clawback” of various payments made before the scheme collapses. Despite a long history of such schemes, the circuit courts have been unable to settle on a consistent and proper remedy for the innocent investors; in some instances, those who innocently profit from fraud (“net winners”) have been untouched by trustees at the expense of those who do not (“net losers”), although at other times, net winners have been stripped of life savings to repay fellow investors who did not withdraw sufficient funds in time.
This Comment analyzes the various remedies put forth by federal courts in the most famous fraudulent investment schemes of the past century and ultimately presents an alternative solution that has yet to be explored: the clawback of principal investments by net winners and net losers alike. In no way does this Comment suggest that this potential response is perfect or should be widely applied. It is simply a formula that could be applicable in certain circumstances, allowing it to subdue some of the inefficient litigation and inequitable rulings that victims must endure after already suffering dreadful harm. In short, it is a moderate suggestion that the current practice of prohibiting clawback of principal from innocent investors should not be the uniform remedy for Ponzi schemes.
The analysis begins with an introduction to the various types of Ponzi schemes, including descriptions of how they operate and examples of the havoc they subsequently wreak. Part II.B discusses the recovery process, the various options available to victims, and the usual effectiveness of each. Part II.C summarizes the remedies thus explored by the courts, including the clawback and distribution systems currently in place. Part III.A enumerates problems with the current approach, whereas Part III.B discusses its advantages. Part III.C puts forth the idea of clawing back principal investments from victims of Ponzi schemes as an alternative remedy with limited applicability. Part III.D concedes the various obstacles with implementing such a practice, whereas Part III.E explains its limited reach. Finally, Part III.F outlines additional considerations in light of the fact that Ponzi schemes persist despite stiff penalties for the criminal operators at the hands of the courts, protective efforts by government organizations, and increased awareness by the public.