Expert Report Regarding the Ponzi Scheme ‘Presumption’ of Actual Intent to Defraud Creditors
66 Pages Posted: 7 Jun 2017 Last revised: 10 Jun 2017
Date Written: August 28, 2013
This Expert Report was filed (and extensively relied upon by the court in its summary judgment decision) in the case of Perkins v. Lehman Bros., Inc. (In re Int’l Mgmt. Assocs.), 563 B.R. 393 (Bankr. N.D. Ga. 2017) (“IMA”), which calls into doubt the validity of the so-called Ponzi “presumption” of actual fraud that characterizes payouts from a Ponzi scheme as transfers made with an actual intent to hinder, delay or defraud a Ponzi debtor’s creditors, within the meaning of fraudulent conveyance law. This Expert Report, filed in the IMA case in 2013, contains the first critical scholarly analysis of the widely adopted Ponzi “presumption” of actual fraud (that now dominates what are often dubbed “clawback” suits to recover Ponzi payouts), challenging its fundamental legitimacy even before the Minnesota Supreme Court rejected the Ponzi “presumption” of actual fraud in Finn v. Alliance Bank, 860 N.W.2d 638 (Minn. 2015).
This Expert Report traces the origins and evolution of the Ponzi “presumption” and exposes fundamental flaws in the supposedly “unassailable” logic on which it is premised. The Ponzi “presumption” confuses (i) the fraudulent inducement intent intrinsic to a Ponzi schemer’s efforts to dupe defrauded investors into transferring funds to a Ponzi debtor, with (ii) the altogether different and unique intent to defraud a debtor’s creditors by removing assets from their reach that is the object of fraudulent conveyance laws. Ponzi payouts involve only the former (fraudulent inducement intent) and not the latter (intent to defraud creditors), as well as an intrinsic intent to prefer some creditors (defrauded investors) over others, which likewise is not the kind of intent to defraud creditors contemplated by fraudulent transfer laws. The confusion sown by the Ponzi “presumption” has proliferated to the point that reductio ad absurdum propositions are accepted without question, such as: (1) a Ponzi debtor’s actual subjective intent is entirely irrelevant!, and (2) those transfers by a Ponzi debtor that do fit the classic pattern of a transfer made with actual intent to defraud creditors (e.g., transfers to the Ponzi scheme perpetrator himself and his family and friends) are not actual-intent fraudulent transfers under the Ponzi “presumption.”
The law of Ponzi scheme “clawbacks” can be rescued from hopeless disarray and folly only by recognizing that the principal bodies of law under which Ponzi scheme payouts are appropriately challenged are (1) the law of so-called “constructive” (i.e., not) fraudulent transfers, and (2) even more significantly (and vastly under-appreciated), the law of restitution and unjust enrichment.
Keywords: Ponzi Schemes; Ponzi Presumption; Fraudulent Transfers; Fraudulent Conveyances; Actual Intent to Hinder, Delay or Defraud Creditors; Constructive Fraud; Fraudulent Inducement; Intent to Prefer; Evidentiary Presumptions; Restitution; Unjust Enrichment
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