New Book on Ponzi Schemes

October 5, 2012

Dear constituency list members of the Insolvency Law Committee, the following is a book review that may be of interest to you:

The Ponzi Book:  A Legal Resource for Unraveling Ponzi Schemes

Authors:  Kathy Bazoian Phelps,[1] Hon. Steven Rhodes[2] Published  by LexisNexis (2012) For more information:  www.theponzibook.com

On three days in August, 2012, the SEC brought three separate fraud charges against multi-million dollar Ponzi schemes — one alleged to be an online $600 million scheme, and another alleged to involve a former collegiate football coach and hall of fame inductee.  The SEC actions were yet another reminder that while the “hook” of the schemes vary, the lure of supposed low-risk, high-return investments has led to a proliferation of Ponzi scheme fraud during the last decade.  Multi-million dollar Ponzi schemes continue to generate new litigation in the wake of the massive Bernie Madoff scandal.

The Ponzi Book is an 800-page reference guide for unraveling the complicated and evolving legal issues arising from  Ponzi schemes in bankruptcy, receiverships and in other third-party litigation.  The book is a thorough, well-organized, and well-written reference for lawyers and other professionals confronting Ponzi scheme issues.[3]  It addresses issues based on federal law, with detail about how different circuits approach cases and, by necessity, with less emphasis on state law tort claims.

Several chapters of The Ponzi Book are dedicated to the prosecution and defense of fraudulent transfer and preference lawsuits (clawbacks) that are commonly filed in Ponzi scheme bankruptcy cases.  Additional chapters discuss the broad array of litigation claims that can be pursued against various types of defendants with knowledge of or involvement in a Ponzi scheme, and the potential defenses to such claims.

Separate chapters address “deepening insolvency” theories, standing, and in pari delicto defenses as they arise in Ponzi scheme litigation.  Since Ponzi schemes often result in criminal prosecutions, The Ponzi Book also covers Fifth Amendment as well as attorney-client privilege issues, and what happens to competing claims for assets in parallel insolvency and criminal proceedings.

The Ponzi Book also provides a review of differing approaches and methodologies available in the claims distribution process, as well as recent tax law changes affecting and of interest to Ponzi scheme victims and their tax advisors.

Finally, and for those representing the alleged facilitators (third parties such as financial institutions, accountants, brokers, and attorneys alleged to have facilitated the Ponzi scheme) and early customers of a Ponzi scheme, the book discusses  the tendency of federal courts to narrowly apply federal claims for relief asserted by victims against third party facilitators of  Ponzi schemes.   The book confirms the need for such victims to look to tort claims under their local state laws – a subject not detailed in the book.

In summary, this is an important resource for those representing  parties in Ponzi scheme cases, including plaintiffs such as receivers, trustees and creditor/investor committees, as well as potential defendants such as clawback defendants and facilitators.  The latest discovery of three multi-million dollar Ponzi schemes underscores the timeliness of this excellent resource.

These materials were prepared by Tom Phinney of Parkinson Phinney, in Sacramento, California, and Dennis Wickham of Seltzer Caplan McMahon Vitek, in San Diego, California, with editorial contributions from ILC member Elissa D. Miller of SulmeyerKupetz, in Los Angeles California.  Mr. Phinney is Co-Vice Chair and Ms. Miller is Co-Chair of the Insolvency Law Committee.

Thank you for your continued support of the Committee.

Best regards,

Insolvency Law Committee

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