Source: https://www.lexisnexis.com/legalnewsroom/bankruptcy/b/bankruptcy-law-blog/archive/2013/12/23/ponzi-scheme-victims-are-courts-looking-under-rocks-for-reasons-to-bar-recovery.aspx?Redirected=true
Timestamp: 2017-05-23 16:08:32
Document Index: 16068257

Matched Legal Cases: ['§ 78', '§ 77', '§ 546', '§ 541', '§ 78', '§ 78']

11:30 AM Author: Kathy Bazoian Phelps
Ponzi Scheme Victims: Are Courts Looking Under Rocks for Reasons to Bar Recovery? What is the defrauded investor to do? Defrauded out of their retirement savings, home equity, and lines of credit, investors often only have litigation claims against third parties to redress their losses. Most people – except usually the Ponzi schemer – feel sorry for the victims. Yet our judicial system seems to continually find ways to block recovery for victims, dismissing their claims before they can even get their case in front of a jury.
Investors cannot bring class actions pursuant to Securities Litigation Uniform Standards Act of 1998, 15 U.S.C. § 78bb ("SLUSA") [an annotated version of this statute is available to lexis.com subscribers].
Heightened pleading standards for class actions pursuant to Private Securities Litigation Reform Act, 15 U.S.C. § 77a, et seq. ("the PSLRA") [annotated version].
They are barred from pursuing certain fraudulent transfer claims under the settlement payment defense in 11 U.S.C. § 546(e) [annotated version].
A recent decision in the Madoff case highlights a few other less obvious problems that trustees and receivers face in recovering money for victims. SIPC v. Bernard L. Madoff Investment Securities, LLC, 2013 U.S. Dist. LEXIS 172638 (S.D. N.Y. Dec. 5, 2013) [an enhanced version of this opinion is available to lexis.com subscribers].
The court in the Madoff case held that the SIPA Trustee did in fact acquire standing from the assignments that he had obtained from the customers of Madoff to bring claims against certain feeder funds for aiding and abetting fraud and unjust enrichment. 2013 U.S. Dist. LEXIS 172638. The court said, “the Second Circuit has held, in the context of a non-SIPA bankruptcy, that ‘a trustee may assert claims assigned to it by a bankrupt's creditors for the benefit of the estate, because those claims can become property of the estate under § 541(a)(7).’" Id. (citing In re CBI Holding Co., Inc., 529 F.3d 432, 459 (2d Cir. 2008) [enhanced version]. In finding that the Madoff trustee had standing to bring validly assigned common law claims, the court concluded that, “where nothing in § 78fff-2(b) explicitly restricts the Trustee's authority to obtain assignments under the Bankruptcy Code, and where such an assignment raises none of the concerns addressed in JPMorgan II, the Trustee has standing as an assignee of creditor claims to assert those creditors' common law causes of action against third-party defendants.”
A covered class action” is "any single lawsuit in which . . . damages are sought on behalf of more than 50 persons or prospective class members, and questions of law or fact common to those persons or members of the prospective class, without reference to issues of individualized reliance on an alleged misstatement or omission, predominate over any questions affecting only individual persons or members." 15 U.S.C. § 78bb(f)(5)(B)(i).
Courts generally have held that bankruptcy trustees should be treated as a single entity under SLUSA in order to avoid undermining a trustee's ability under the Bankruptcy Code to pursue claims owned by the debtor. See LaSala v. Bordier et Cie, 519 F.3d 121, 136 (3d Cir. 2008) ("Giving effect to Congress's desire not to preempt claims that pass from a debtor corporation to its bankruptcy estate is important because to do otherwise would work a significant change in the bankruptcy system that Congress created and, according to the legislative history cited above, intended to leave undisturbed.") [enhanced version]. Here, however, the Trustee is not attempting to pursue claims belonging to the debtor, a single entity, for the benefit of many; rather, he seeks to assert claims belonging to many creditors as a single entity. Thus, the Court must look through the Trustee's form to the source of the Trustee's claims in order to properly apply SLUSA on the facts of this case.