Beneficiaries of a Ponzi scheme who were subsequently found liable to cheated investors under state securities laws could not discharge this liability under Chapter 7 of the Bankruptcy Code, the U.S. District Court for the Western District of Oklahoma ruled.
Two unwitting investors in a $9 million Ponzi scheme who benefited from the fraud were sued by those who lost money, and a state court found the investors liable for unjust enrichment pursuant to the Oklahoma Uniform Securities Act, Okla. Stat. tit. 71 Section 1-101 et. seq, requiring them to disgorge the profits received from the scheme.
The investors sought to discharge this debt by filing Chapter 7 bankruptcy actions. The Bankruptcy Court held that debts stemming from violations of state securities laws are not dischargeable. The investors appealed, arguing that they did not directly violate the Oklahoma statute, but the district court affirmed, holding that the Oklahoma statute provides for disgorgement of profits despite the absence of wrongful intent. (Okla. Dept. of Secs. ex rel. Faught v. Matthews, No. 09 Civ. 185-D, 2010 WL 567837 (W.D.Okla. Feb. 10, 2010)); (Okla. Dept. of Secs. ex rel. Faught v. Wilcox, No. 09 Civ. 186-D, 2010 WL 567988 (W.D.Okla. Feb. 10, 2010))