pennies stacked on a dollar bill

Posted by Mark Pugsley.

By Jared N. Parrish

“Once a receiver takes over you won’t see a dime.”

“The lawyers for the receiver will just take all the money and leave nothing for investors.”

“Don’t file a claim because there won’t be any money available anyway.”

These are some of the most common statements I hear from investors who put money into a financial fraud that is later placed in receivership. The modern lexicon of Ponzi schemes and financial fraud cases is wrought with pessimism and a seeming presumption that no money will flow from a judicially-created receivership estate to the defrauded investors. This is a dangerous misconception which is not borne out in practice. However, the misconception continues to lead many victims of financial fraud to the conclusion they should not pursue their claim against the receivership estate.

Recently, two major Utah receivership cases have returned 100% of losses to the investors who filed claims. Most recently in the Securities and Exchange Commission’s enforcement action against Management Solutions, Inc., U.S. District Court Judge Bruce Jenkins approved a distribution plan which will repay all investor claimants all of their principal losses. In his address to the Court during the distribution plan hearing, Daniel Wadley, the lead trial counsel for the Securities and Exchange Commission, noted that the biggest fear he had heard from investors early in the case was that the receivership was going to suck up all the money in legal and other professional fees. Over 400 claims were filed in that receivership.

In another example, U.S. District Court Judge David Nuffer approved a distribution plan in the Securities and Exchange Commission’s action against Impact Payment Systems and John Scott Clark which also returned 100% of principal losses to all claimants. Impact Payment Systems was a payday lending operation based in Logan, Utah which was operated as a Ponzi scheme. The Receiver, Gil A. Miller of Rocky Mountain Advisory, has disbursed over $18 million to investors.

A receiver’s principal duty is to marshal and protect the assets of the companies under his or her control, and to determine whether those companies can continue to operate lawfully after the principals have been removed. Receivers are uniquely suited to recover money and other assets that have been transferred by the principals of a financial fraud to others, so that those assets can be distributed to the defrauded investors. Federal and state laws protect receivers from traditional legal challenges which face other types of parties in litigation and in the administration of companies in receivership, making the path to recovery of assets easier.

The investor, not the receiver, bears the duty to pursue their claim in a receivership. This means it is the responsibility of the investor to keep informed about the receivership, to file a claim form, and to prosecute that claim if they disagree with the receiver’s distribution plan. A receiver will not simply look to a company’s internal records to find investors and send money to them. If an investor who has lost money in a financial fraud does not file a claim in the case they will receive nothing. I have spoken with dozens of investors who failed to file claims in receivership cases and are rendered ineligible for a distribution. The excuses range from, “I didn’t think there would be any money” to “my investment adviser told me not to file.” An investor who does not file a claim form, but subsequently wishes to receive a distribution, must file a motion with the receivership court and demonstrate “excusable neglect” for their failure to file. The rationale, “I didn’t think there would be any money,” is not excusable neglect.

The perception that investors will receive nothing once their investment is placed in receivership is generally wrong, and acts as a deterrent to filing a claim. Equity receivers work very hard to generate the highest possible return to as many investors and other claimants in a receivership as possible. Failing to timely file a claim with a receiver is a mistake which can cost defrauded investors a return of much, if not most, of their principal losses.

While an investor typically does not need the assistance of counsel to file a claim in a receivership, it is very helpful to have an experienced lawyer who can keep better apprised through the Court’s notification system regarding the status of the case and who can analyze the distribution plan and claim classification decisions by the Receiver.

Jared N. Parrish is a member of the firm’s Receivership and Securities Litigation practice groups. His practice is devoted to matters involving securities litigation, federal equity receiverships, compliance, state and federal regulatory investigations and enforcement actions. He has represented equity receivers and claimants in some of Utah’s largest financial fraud cases.

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