When a Ponzi sc…

When a Ponzi scheme collapses, the result is often two or three parallel proceedings––

a forfeiture action filed by the Department of Justice, a civil securities enforcement action filed by the Securities and Exchange Commission, and a bankruptcy proceeding. Each has procedures for compensating the victims of the scheme, but the procedures are different and conflicting. Resolving those conflicts through litigation can result in significant expense and delay in compensating victims.

Recognizing this, and in an effort to use the more advantageous aspects of each process, the DOJ and bankruptcy trustees often negotiate coordination agreements that divide and assign the responsibilities for recovering and distributing assets. Competing Processes for Compensating Ponzi Victims The DOJ initiates the asset forfeiture process, whether civil or criminal, as a part of its prosecution of the crimes that the Ponzi perpetrator has committed, which may include mail fraud, wire fraud, securities fraud, money laundering, and conspiracy, Just to name a few. In the forfeiture process, the DOJ seizes the property that the perpetrator used in the commission of these crimes and the proceeds of these crimes, as provided in 18 U.S.C. § 981.

The DOJ then uses the forfeited assets to compensate the victims of the perpetrator’s fraud through its remission and restoration process under 21 U.S.C. § 853(i)

(1) (relating to the disposition of criminal forfeiture proceeds) and 18 U.S.C. § 981(e)(6) (relating to the disposition of civil forfeiture proceeds). Remission is the means by which forfeited property is distributed to crime victims. Restoration is the means by which forfeited property is used to satisfy a criminal restitution order for crime victims. This distribution process is done entirely within the DOJ andin the discretion of the attorney general.  At the same time, the Securities and Exchange Commission may also file a civil enforcement action under 15 U.S.C. § 78u(d). The district court may then immediately appoint a receiver over the perpetrator’s property for the benefit of the scheme’s victims. Finally, the perpetrator may also face bankruptcy, which can happen in any of three ways. The perpetrator itself may file a voluntary bankruptcy petition. Or, through an involuntary bankruptcy proceeding under 11 U.S.C. § 303, the victims of the scheme may obtain bankruptcy relief and the appointment of a trustee. Or, the receiver appointed through the SEC civil enforcement action may file a petition for the perpetrator. In any event, under 11 U.S.C. § 541(a), all of the perpetrator’s property becomes property of the bankruptcy estate, excepting forfeited property under the “relation back” doctrine, discussed below. Experience suggests that conflicts be between  receivership proceedings and forfeiture  proceedings are rare, perhaps because receivers may be more inclined than bankruptcy trustees to defer to the government’s desire to liquidate and distribute forfeited assets. Whatever the reason, because conflicts between bankruptcy and forfeiture are much more common, the discussion is limited to those conflicts and their resolution through coordination or cooperation agreements. It is important to note that the forfeiture proceedings and the bankruptcy proceedings are filed in two different courts, with two different judges presiding. The bankruptcy court hears all matters relating to the bankruptcy case, while the district court presides over the forfeiture proceedings.

Each court applies a different set of rules to its respective processes. Both forfeiture and bankruptcy have procedures for compensating victims by (1) marshaling the perpetrators’ assets, (2) liquidating those assets, (3) fixing victims’ claims to the proceeds of those assets, and 4) distributing those proceeds to victims. There are, however, significant differences in these four key aspects of these procedures. As a result of these differences, each system has advantages and disadvantages, proponents, and critics.

From article published by

By Hon. Steven W. Rhodes


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