Posted by Mark Pugsley.

Over the past several years I defended about sixteen clawback lawsuits that were brought by the Receiver in the $200 million Vescor Receivership here in Utah. The unfortunate reality of these cases is that many investors in Ponzi schemes ultimately get sued by the Receiver — even though they thought they were victims.

Although they usually don’t realize it, investors who invest early in a long-running Ponzi Scheme often receive more money back than they put in because these schemes typically pay out high rates of interest. They might think they lost money because their principal is gone, but in reality they more than made it up in interest payments over the years — made with new investors’ money.

Other targets of clawback lawsuits include the investors who withdrew all of their money before the fund collapsed. They might feel lucky to have avoided the collapse initially, but when the receiver comes calling they begin realize that there is no way for them to retain the “profits” they thought they were entitled to. The theory is that these payments were made at the expense of other, new investors and so the money needs to be brought back into the receivership and redistributed.

When a receiver takes over a company that was run as a Ponzi Scheme he or she is given the thankless task of determining where the money went, and then pulling it all back into the company and distributing it evenly among the investors. The money is pulled back through these aptly-named “clawback” lawsuits. Court-administered receiverships are rarely efficient or fair, and usually only a fraction of the funds ever get returned to investors, but unless Congress steps in and changes things they will continue to be the preferred method. An interesting article about the problems and criticism faced by receivers in Ponzi cases can be found here.

Many of the investors I represented in Vescor clawback cases were shocked when they got sued by the receiver in that case. There are few defenses to a clawback case, and the unfortunate reality is that most of the money gets eaten up by legal fees. The only ones who benefit are the lawyers. Now the Madoff investors are bracing for lawsuits that will be filed shortly by the receiver in that case.

© 2010 Mark W. Pugsley, all rights reserved.

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