Presenting a 105 ‐ Minute Encore Presentation of the Teleconference with Live, Interactive Q&A Fraudulent Transfers: Ponzi Scheme Clawback Litigation in Bankruptcy Strategies for Bringing or Defending Trustee Clawback Claims WEDNES DAY, AUGUS T 17, 2011 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific T d Today’s faculty features: ’ f l f Corey R. Weber, Partner, Ezra Brutzkus Gubner , Woodland Hills, Calif. Mark S . Kaufman, Partner, McKenna Long & Aldridge , Atlanta Anthony L. Paccione, Partner, Katten Muchin Rosenman , New Y ork The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Fraudulent Transfers: Ponzi Scheme Fraudulent Transfers: Ponzi Scheme Clawback Litigation in Bankruptcy Clawback Litigation in Bankruptcy Clawback Litigation in Bankruptcy Clawback Litigation in Bankruptcy Strategies for Bringing or Defending Strategies for Bringing or Defending Strategies for Bringing or Defending Strategies for Bringing or Defending Trustee Clawback Claims Trustee Clawback Claims Sponsored by the Legal Webinar Group of Strafford Sponsored by the Legal Webinar Group of Strafford Publications Publications Mark S. Kaufman, Partner, McKenna Long & Aldridge LLP Mark S. Kaufman, Partner, McKenna Long & Aldridge LLP Anthony L. Paccione, Chair NY Litigation Department, Katten Anthony L. Paccione, Chair NY Litigation Department, Katten Muchin Rosenman LLP Muchin Rosenman LLP Corey Weber, Partner, Ezra Brutzkus Gubner LLP Corey Weber, Partner, Ezra Brutzkus Gubner LLP 5
Introduction Introduction “When the financial tide goes “When the financial tide goes When the financial tide goes When the financial tide goes out is when you will see who out is when you will see who is swimming naked” is swimming naked” is swimming naked is swimming naked 6
Threshold Questions Threshold Questions What is a “Ponzi Scheme? When does it begin? g SIPC Protected? Type of Receiver to Be Appointed Type of Receiver to Be Appointed 7
Today s Topics Today’s Topics Clawbacks – From the Trustee’s perspective Prima Facie Clawback case based on P i F i Cl b k b d Fraudulent Conveyance Clawbacks from a Transferee’s Perspective Clawbacks from a Transferee s Perspective “Mere Conduit” and Other Specific Clawback Defenses Trustee claims vs. Secondary Actors: Claims and Defenses 8
TRUSTEE’S CLAWBACK CLAIMS CLAIMS • Preference Preference – Section 547claims • Fraudulent Transfer – Section 548 and 550 claims – Section 544 and UFTA state law claims 9
10 PREFERENCE CLAIMS PREFERENCE CLAIMS
PREFERENCE CLAIMS PREFERENCE CLAIMS • Transfers in Ponzi schemes are more Transfers in Ponzi schemes are more vulnerable to attack as fraudulent transfers – In re Grafton Partners, L.P., 321 B.R. 527, , , , 532 FN 5 (9 th Cir. BAP 2005) • However, transfers in Ponzi cases can still be recovered as preferences – In re United Energy Corp , 102 B.R. 757 (9 th Cir. BAP 1989) 11
Defenses to Preference Claims Defenses to Preference Claims • Same defenses as to a normal preference Same defenses as to a normal preference claim • But, no ordinary course defense – Henderson v. Buchanan , 985 F.2d 1021, 1025 (9 th Cir. 1993) – In re Bullion Reserve Co. of North America , 836 F.2d 1214, 1219 (9 th Cir. 1988) 12
13 FRAUDULENT TRANSFER CLAIMS
Actual Intent Claims Actual Intent Claims • Guilty plea in criminal case for the Ponzi scheme y p principal can conclusively establish actual intent – Johnson v. Neilson (In re Slatkin) , 525 F.3d 805, 814 (9 th Cir 2008) (9 th Cir. 2008) – Bear Stearns Securities Corp. v. Helen Gredd, Chapter 11 Trustee (In re Manhattan Investment Fund Ltd.) , 397 B.R. 1, 12 (S.D. N.Y. 2007). ) (S ) • If there is no guilty plea, the Trustee will need to establish actual intent 14
Ponzi Scheme Presumption Ponzi Scheme Presumption • If the Bankruptcy Court concludes that the If the Bankruptcy Court concludes that the Debtor operated as a Ponzi scheme, actual intent to hinder delay or defraud actual intent to hinder, delay or defraud creditors will be established – Donell v. Kowell , 533 F.3d 762, 770 (9 th Cir. Donell v Kowell 533 F 3d 762 770 (9 th Cir 2008) 15
Constructive Fraud Constructive Fraud • If there is a plea agreement constructive If there is a plea agreement, constructive fraud claims will have the same outcome as actual intent claims as actual intent claims • If there is no plea agreement, the If th i l t th insolvency tests provide an alternate way t to prove liability li bilit 16
Fraudulent Transfer Claims U d Under State vs. Federal Law S F d l L • 2 year pre-bankruptcy petition reach-back under y p p y p Section 548 • There is normally a longer reach back under • There is normally a longer reach-back under state law – In California, the reach back period is up to 7 years (C l Ci il C d (Cal. Civil Code Section 3439, et seq.) S ti 3439 t ) • Statute of limitations Statute of limitations – Trustee has 2 years to file a complaint post- bankruptcy 17
Fictitious Profits Fictitious Profits • General rule is that the Trustee’s recovery General rule is that the Trustee s recovery is limited to recovery of fictitious profits from net winners from net winners • Withdrawals - Investments = Fictitious Withd l I t t Fi titi Profits in most circuits – Donell v. Kowell , 533 F.3d 762, 770 (9 th Cir. 2008) 18
FICTITIOUS PROFITS IN THE MADOFF CASE MADOFF CASE • “Equality is achieved in this case by employing the q y y p y g Trustee's method, which looks solely to deposits and withdrawals that in reality occurred. To the extent possible, principal will rightly be returned to Net Losers p p p g y rather than unjustly rewarded to Net Winners under the guise of profits. In this way, the Net Investment Method brings the greatest number of investors closest to their g g positions prior to Madoff's scheme in an effort to make them whole.” In re Bernard L. Madoff Inv. Sec. LLC , 424 B.R. 122, 142 (Bankr. S.D.N.Y. 2010) 19
Potential for the Trustee to Recover More than to Recover More than Fictitious Profits • The Trustee can recover the total transfers from the Debtor to the defendant (fictitious from the Debtor to the defendant (fictitious profits + return of principal) if he establishes his prima facie case and the establishes his prima facie case and the defendant does not establish his defenses 20
A. Defenses to the Prima Facie Case Once the Trustee or DIP has established a prima facie case for a fraudulent conveyance by satisfying the y y y g criteria to demonstrate either actual or constructive fraud committed by the Transferor, the transferee may be able to defeat its liability as a recipient of a fraudulent conveyance by raising one or more defenses defenses. 21
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