In what is likely to be the final chapter in the Ross Asset Management (RAM) liquidation, assuming no appeal is filed, the High Court has considered an application for directions by the liquidators of Ross Asset Management concerning how best to distribute recovered funds.  David Ross operated RAM as a Ponzi scheme for decades until the fraud was uncovered in 2012 and the company went into liquidation.  Mr Ross is currently serving a ten year plus term of imprisonment for his role as architect of the scheme.  Claims in the liquidation total $125m against recoveries of approximately $18.5m.

The key issue for the Court concerned the method of distribution in this case to the approximately 860 investors.  Those investors fall into two categories: those who contributed less to the scheme than they withdrew, and those who contributed more to the scheme than they withdrew.  Those who had contributed less to the scheme than they had received were precluded from participating in any distribution.  For those remaining investors, the High Court endorsed the 'constant dollar' approach, which is to say that the Court approved of the liquidators adjusting the value of investments and withdrawals by reference to the consumer price index to reflect inflation.  The Court also endorsed the 'net contribution model' described as "identifying each investor's capital investment in the scheme (ignoring fictitious returns), deducting the amount of any withdrawals by that investor and thereby identifying the investor's net loss".  This model was endorsed for both company assets (necessarily subject to the Companies Act liquidation regime) and for trust assets (to which the Companies Act has no direct application).  The alternative model, put forward by the Court appointed amicus, and supported by one of the scheme's investors, was referred to as the 'alternative distribution model'.  The alternative model involved calculating the amount of each investor's withdrawal as a percentage of the investor's investment.

The models, while both seeking to achieve fairness to investors, would have resulted in different outcomes.  Under the alternative distribution model, the number of investors eligible for a distribution would reduce from 639 to 418, in effect, increasing the likely distribution from 11 cents in the dollar to approximately 18 cents in the dollar.  Only those investors who made no withdrawals prior to RAM's collapse and liquidation would receive the full 18 cent distribution.  The Court decided that, by a narrow margin, the net contribution model should be adopted for both company and trust assets but in so doing, expressly rejected the argument that the Companies Act, and the principles that apply to the distribution of company assets must necessarily dictate the distribution of trust assets.  Associate Judge Johnstone specifically noted that "insolvency law principles are not necessarily appropriate for application to Ponzi schemes".  Nevertheless, he was influenced by, among other things, the dicta from the Supreme Court in Fisk v McIntosh (see our earlier update here) that indicated the Supreme Court had proceeded on the assumption that a net contribution model would govern the distributions of all assets.  In the end, he was attracted to the model that would benefit the greater number of claimants.

The full decision is available here.