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. For more, see our article on suing the auditor after a collapse.

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. Our article on when a bank can be liable for a customer’s Ponzi scheme covers the standard in more detail.

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.

Net winners and net losers

Receivers and courts generally net what each investor put in against what the scheme paid out. Investors who got back less than their principal are net losers and usually share in the receivership distribution. Investors who got back more than they invested are net winners, and receivers often sue them to recover the excess. Good faith generally protects the return of principal but not profits.

Claims against the people who sold the investment

Many schemes are sold through promoters, sales agents and advisers who were paid to bring in investors. State securities laws can make the seller, and the individuals who personally participated in the sale, liable to the investor for rescission or damages, and registration violations can support a claim without proof of fraud. See Miami investment fraud and Bay Area investment fraud.

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

Tax treatment of Ponzi scheme losses

The tax rules can soften a loss. The IRS treats a loss from criminal fraud in a transaction entered into for profit as a theft loss, not a capital loss, deductible under section 165(c)(2) of the Internal Revenue Code and not subject to the dollar floor and percentage limits that apply to personal casualty and theft losses. Rev. Rul. 2009-9. The post-2017 restriction on personal casualty and theft losses, which Congress made permanent in 2025, applies only to losses described in section 165(c)(3), not to investment losses under section 165(c)(2). 26 U.S.C. § 165(h)(3)(B), (h)(5)(A).

The IRS also offers an optional safe harbor for qualifying Ponzi scheme losses. An investor who elects it may deduct 95 percent of the qualified investment if he or she does not pursue third-party recovery, or 75 percent if he or she is pursuing or intends to pursue it, less any actual recovery and any potential insurance or SIPC recovery, generally in the year the lead figure is criminally charged. Rev. Proc. 2009-20, §§ 4.04, 5.02, modified by Rev. Proc. 2011-58 (extending the safe harbor to certain cases in which the lead figure died before being charged). The choice between the safe harbor and the general theft loss rules interacts with any lawsuit against third parties, so the litigation strategy and the tax strategy should be decided together, with the investor's tax adviser.

The first steps after a collapse

1. Preserve everything. Keep statements, tax forms, wire records, e-mails, texts and marketing material. Do not delete messaging apps.
2. Calculate your net position. Total what you put in and what you took out, by account, so you know whether you are a net loser or a net winner.
3. Watch the receivership docket. Claims deadlines and bar orders are set by the court, and missing a claims deadline can forfeit a distribution.
4. Do not sign anything quickly. Releases, settlements and clawback agreements can give up claims against third parties.
5. Identify the professionals. List the banks, auditors, administrators, valuation firms, brokers and law firms that touched the investment.

Questions clients ask

The scheme just collapsed. Should I wait for the receiver?

No. File any claim the receivership requires, but evaluate your own claims at the same time. Receivership orders usually do not stop the clock on claims against outside firms or the people who sold the investment.

Can I deduct my loss?

Often, yes, as a theft loss in the year the fraud is discovered or under the IRS safe harbor. Coordinate the tax election with any lawsuit you bring, because expected recoveries affect the deduction.

Who pays if the operator has nothing left?

Recoveries often come from third parties: banks, auditors, valuation firms, administrators, brokers and the individuals who sold the investment, and their insurers.

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.