Ponzi Schemes Are an International Problem

Posted by Kathy Bazoian Phelps

   Courts across the globe are dealing with the peculiar issues arising in the administration of Ponzi scheme cases, struggling to do equity and to get the defrauded victims at least some of their money back. 

   The purported business operations of these Ponzi schemes are as varied and diverse as the countries in which they proliferate. The schemes range from securities trading to goat rearing scams and tend to take on the character and customs of the local culture. What remains a constant in all varieties of Ponzi schemes, however, is that the investors lose money. Defrauded victims then seek compensation from the resulting insolvency proceedings of the perpetrator.

   The Eastern Caribbean Supreme Court of Antigua and Barbuda recently issued a decision in the Stanford International Bank liquidation regarding the issue of how to fix the investors’ claim amounts. The decision is here. The Court ultimately approved the modified net investment methodology for allowance of claims for Ponzi scheme investors. The net investment method was the methodology used in the Bernard Madoff case, as affirmed by the Second Circuit in In re Bernard L. Madoff Investment Securities, LLC, 654 F.3d 229 (2d Cir. 2011). However, the Court also took the time to analyze competing claims allowance methodologies such as the Last Statement Method and the Rising Tide Method.

   The Court relied heavily on U.S. law in reaching its conclusion, noting that:

It is clear that the United States’ legal system, covering a vast economy, has developed very sophisticated remedial measures to deal with this unfortunately persistent form of fraud. Such measures include numerous instruments of primary legislation as well as case law jurisprudence. There are even practitioners’ text books, such as “The Ponzi Book, A Legal Resource for Unraveling Ponzi Schemes”, by Phelps and Rhodes, published by LexisNexis.

   In carefully considering the consequences of the different claims allowance methodologies, the Court relied heavily on The Ponzi Book, describing it as “that most helpful work” and quoting from Chapter 20.04 extensively in its evaluation of the competing methodologies. The Court dismissed the Last Statement Method, finding that it was “equally absurd for SIB as it was for Madoff.” The Court observed, “In both cases the investors were duped by a falsely represented investment strategy[,]” and “In both cases the profits or interest respectively which was credited or paid to investors derived directly from deposits from subsequent investors, and not from legitimate investment returns.”

   The law coming out of Ponzi scheme cases continues to evolve on a nearly daily basis. The Eastern Caribbean Supreme Court of Antigua and Barbuda aptly noted, “It is . . . clear that [the U.S.] great legal system continues to develop rational solutions to do equity for the innocent victims of Ponzi schemes, but with painful difficulty, precisely because ‘Ponzi schemes’ have no inherent integrity.”