Ponzi Scheme and Investor Fraud Recovery

When an investment turns out to be a fraud, the person who ran it can rarely repay investors. What can be recovered usually sits in three places: assets a court-appointed receiver can collect, payments that went out to other investors and insiders, and the firms whose services kept the scheme running. Reiser Law represents defrauded investors in pursuing these recoveries from offices in the San Francisco Bay Area and Miami.

Where recoveries come from

1. The receivership estate. After a collapse, the SEC or a state regulator often asks a court to appoint a receiver to take control of what is left and distribute it through a claims process.
2. Clawbacks. Receivers sue investors and insiders who took out more than they put in, and return those funds to the estate.
3. Third parties. Auditors, valuation firms, banks, fund administrators and others who enabled the fraud can be liable for the losses it caused, and they are often the only defendants with the resources to pay.
4. The people who sold the investment. Brokers, advisers and promoters who recommended the investment may be liable in court or in FINRA arbitration.

Aiding and abetting: the core third-party claim

A bank or an accounting firm is not liable simply because it did business with a fraudster. The claim that most often reaches these firms is aiding and abetting fraud or breach of fiduciary duty. Courts in California and Florida generally require three things: an underlying fraud or breach, the defendant's actual knowledge of it, and substantial assistance in carrying it out.

Knowledge is usually the contested element. Showing that a firm should have known is generally not enough. Actual knowledge can be proven with circumstantial evidence, however, including warning signs the firm saw and did not act on, its own internal alerts, and accommodations it made that it would not have made for an ordinary client.

Auditors

A fund's audited financial statements are often what investors rely on to believe their money is real. When an audit missed or disregarded evidence of fraud, the auditor may face claims for professional negligence, negligent misrepresentation, or aiding and abetting.

The threshold question is who may sue. Both California and Florida limit when someone other than the auditor's client can recover for negligence. Investor claims therefore turn on facts such as how the fund was structured, whether the auditor knew investors would receive its report, and how the audited statements reached them.

Valuation firms and fund administrators

Funds that hold hard-to-value assets, such as private loans, real estate or private company stock, depend on outside firms to price them. Inflated values drive the management fees, redemptions and new investment a scheme needs to survive. Claims against valuation firms and administrators focus on whether the firm tested the manager's numbers or simply adopted them, and what it learned along the way.

Banks

Banks generally owe no duty to people who are not their customers, and processing a fraudster's transactions is not enough by itself to create liability. Claims against banks usually rest on aiding and abetting, so the evidence centers on what the bank knew. That can include account activity with the hallmarks of a Ponzi scheme, such as new investor money paying earlier investors, commingling, and round-trip transfers between related accounts, along with the bank's own anti-money-laundering alerts and any exceptions it made for the account.

When a receiver brings these claims on behalf of the entity that ran the scheme, defendants often argue that the receiver stands in the wrongdoer's shoes and cannot recover for a fraud its predecessor committed. Courts treat that defense differently depending on the jurisdiction and the facts.

Receiverships, clawbacks and claims processes

Receivership distributions are usually made pro rata based on each investor's net loss. Investors may need to file claims in the receivership, respond to clawback demands, and decide whether to pursue their own claims against third parties or rely on the receiver's.

Receivers pursue payments to net winners under the fraudulent transfer statutes, including California's Uniform Voidable Transactions Act (Cal. Civ. Code § 3439 et seq.) and Florida's Uniform Fraudulent Transfer Act (Fla. Stat. ch. 726). Courts frequently treat payments from a Ponzi scheme as made with intent to defraud. Investors who received back less than they invested are usually protected as to their principal if they acted in good faith, although receivers sometimes challenge that defense. Our article on recovering losses after a Ponzi scheme explains how these pieces fit together.

Deadlines

Limitations periods for fraud, negligence and aiding-and-abetting claims generally run from when an investor discovered, or should have discovered, the facts. The collapse of the scheme, a regulator's complaint or a receiver's report can start that clock. Receivership orders commonly bar lawsuits against the receivership entities, but they usually do not stop the clock on claims against outside firms. Waiting for a receivership to finish can mean losing claims that were available.

Brokers, advisers and FINRA arbitration

When a broker or registered representative recommended the investment, claims usually proceed in FINRA arbitration under the customer agreement. We handle those claims, including claims on behalf of older investors. See our article on elder financial abuse and FINRA arbitration.

Cryptocurrency and securities fraud

We also represent investors in claims arising from cryptocurrency platform failures and securities fraud, including claims against the banks and service providers that did business with the platform.

Our experience

We have represented groups of investors in lawsuits against professional services firms alleged to have aided and abetted investment fraud. See our representative cases. Past results do not guarantee a similar outcome.

Where we practice

Our Bay Area office in Walnut Creek handles matters in California superior courts and the federal district courts in California. Our Miami office on Brickell Avenue handles matters in Florida state courts and the U.S. District Court for the Southern District of Florida. We work with co-counsel on matters in other federal districts and in arbitration. Isabella Martinez atiende a clientes en español.

If you have lost money in an investment fraud

Gather your subscription documents, account statements, tax forms, wire records and communications with the promoter and any adviser. Keep any letters from a receiver or regulator. Do not sign a release, settlement or clawback agreement before you understand what claims you may be giving up.

Call (925) 256-0400 (San Francisco Bay Area) or (305) 726-2003 (Miami), or contact us.

Attorney advertising. Past results do not guarantee a similar outcome. Each matter depends on its own facts and law. Contacting us does not create an attorney-client relationship.