Ponzi Perspectives: Ending 2021 Summary | McGuireWoods LLP
McGuireWoods’ Ponzi Litigation team launched its Ponzi Perspectives blog in early 2021 to follow up on key decisions and new cases in Ponzi civil and criminal proceedings. Ponzi Perspectives focuses on cases and decisions that may affect the right of control over questions related to Ponzi. The blog also provides an analysis of key decisions and practical considerations in defending Ponzi law suits. This year-end 2021 executive summary sums up the new cases and opinions analyzed over the course of the year and highlights the trends that can serve as “upcoming attractions” for what to expect in 2022.
The 2021 Ponzi litigation included major SEC enforcement cases and related cases, relief claims against financial institutions, and real estate and retirement schemes.
In the opening year of Ponzi Perspectives, McGuireWoods aggregated over 35 lawsuits filed in federal and state courts across the country, including 17 federal district courts and 5 state courts from Massachusetts to California.
With the SEC filing 7% more enforcement actions in 2021 compared to 2020, these newly filed cases include significant enforcement actions by the SEC, which often spurred civil lawsuits from defrauded investors as well. Some of the plans that will involve SEC litigation in 2021 include:
- SEC against Horwitz: Largest film finance Ponzi program in US history ($ 690 million) that was also the subject of two civil proceedings filed by groups of duped investors in 2021, Whitmore v. Horwitz and Fiene v. Schweinzger.
- SEC v. Estate of Kenneth J. Casey: Elderly program that made over $ 150 million in Ponzi payments with investor money and was the subject of civil litigation in 2021 Morrison v. Rockwell Filed by a group of duped investors.
- SEC v MJ Capital Funding, LLC, et al.: Scheme that led investors to believe that they were funding traders’ cash advances for small businesses. This plan resulted in a class action lawsuit by a group of investors, Bautista et al. v. Wells Fargo Bank, NA
- SEC v Woods et al.: Program that raised $ 110 million in fraud against older retirees and resulted in a class action lawsuit by a group of investors, 6694 Dawson Blvd, LLC v Oppenheimer & Co., Inc.
- SEC v Bullard: System that uses nearly $ 500,000 in Paycheck Protection Program funds to keep making payments to investors and stay afloat before the collapse.
In addition to the SEC’s enforcement actions, more than a quarter of the new complaints pooled in 2021 included fiduciary violations, aiding and abetting and / or negligence suits. The frequency of these types of claims shows that duped investors continue to seek redress from those with deep pockets when a system breaks down (and the culprits are usually insolvent), such as a bank that has provided routine banking services to the system provider. For example:
As for theme trends in 2021, a number of cases (7) involved investors duped into promising high returns on a real estate transaction or investment, including residential and commercial real estate, off-campus student dormitories, wooden wings, and so on a ski area. In addition, there were several programs that targeted the most vulnerable, the elderly, and / or life insurance proceeds, retirement funds, and other retirement assets. After all, there was at least one scheme that involved the alleged sale of cryptocurrency. Lowry et al. v. Edelman et al., a largely unregulated area that is rapidly gaining popularity and likely to be another fodder for Ponzi-related activities in 2022 and beyond.
Ponzi-related decisions in 2021 provided insight into relief claims and strategies to defend them, the scope of beneficiaries’ position, and emerging markets for Ponzi programs.
In relation to the decisions pursued by Ponzi Perspectives in 2021, McGuireWoods analyzed opinions on Ponzi of the Second, Fifth, and Eleventh Districts, as well as some federal district courts, that provide guidance to financial institutions in defending against claims related to Ponzi.
One of the decisions that were analyzed from the second circle, Heinert v Bank of America, NA., demonstrates the rigorous standard of pleading a plaintiff may face when alleging that a financial institution has supported a pyramid scheme and / or breached its duty of loyalty by providing routine banking services. There the Second Circuit made it clear that a plaintiff must assert that the bank had actual knowledge of the alleged misconduct to survive a dismissal motion and that constructive knowledge was insufficient.
Ponzi Perspectives also analyzed the decision of the Southern District of New York in Anderjaska v Bank of America, NA et al.demonstrating how procedural instruments – such as the petition for dismissal for lack of personal jurisdiction – can be valuable in limiting and / or defending against Ponzi claims against national banks in forums where they are neither registered nor primarily located.
McGuireWoods also considered decisions by the Fifth and Eleventh Circuits and the District of Minnesota relating to the authorization of a bankruptcy administrator to bring claims under a Ponzi scheme. While the Eleventh Ward limited the liquidators’ ability to bring ponzi-related claims against third party banks on behalf of investors, Isaiah v JPMorgan Chase Bank, NA, the Fifth Circle stopped in Rotstain v. Mendez that liquidators are empowered to bring claims on behalf of investors, including a bank, if those claims are dependent on and derived from the claims of the liquidator. In light of these rulings, financial institutions and other third parties that inevitably find themselves caught up in the barrage of litigation following a collapsed Ponzi scheme should carefully consider whether the party making the claim is entitled to do so.
Finally, Ponzi offered strategic and practical considerations in defending against film funding after the collapse of the Ponzi film-funded litigation Horwitz to plan. Ponzi programs are likely to continue to grow in this fast-growing market, especially as competition between streaming services and demand for streaming content continue to grow. Banks and financial institutions should be aware of the prevalence of these systems and the risk of becoming embroiled in civil litigation after the collapse of a Ponzi scheme, as the victims will target deep pocketed parties, as shown above.