In 2008, a few months before the $65 million Madoff Ponzi scheme fell apart, the $3.65 billion Petters Ponzi scheme made headlines. Tom Petters told investors that they were financing the purchase and sale of consumer electronic goods when no goods existed. Rather, Petters used funds from new investors to pay off old investors. He and ten other individuals tied to the scheme have been convicted. Now, similar to the bankruptcy trustee in the Madoff case, Petters bankruptcy trustee Doug Kelley has formed a new international team of lawyers who specialize in asset recovery and who will attempt to claw back assets that can be linked to the Petters scheme.
Clawback lawsuits seek to recover profits paid to scheme investors that exceed those investors’ initial investments. Courts have widely accepted the legal concept of damages that holds investors can recover from earlier investors in a Ponzi scheme because the earlier investors simply derived returns from the redistribution of funds of incoming investors rather than from legitimate business activities. There is recognition that it is unjust to allow earlier participants to keep the benefit of funds that had been stolen from others.
The bankruptcy court allowed extensive discovery, which has enabled access to lists of investors in the international operation, and an effort is now under way to determine who invested what and who received what in return. The efforts to find the investors and claw back the assets have required the retention of numerous law firms throughout the world that will chase investors worldwide in diverse legal and financial systems such as Japan, Bahrain and Monaco. The court also recently ruled that the trustee can go back as far as 13 years from the 2008 bankruptcy filing to the beginning of the Petters Ponzi scheme to collect fraudulent transfers between Petters and early investors.
Critics of this effort suggest that the costs of chasing down the targets, including extensive attorneys’ fees, may outweigh the benefits to the investors. The Petters bankruptcy trustee has indicated that he continues to evaluate the costs in conjunction with the likelihood of success of pursuing the clawback lawsuits. For more information, click here.