Expanding the Ponzi Scheme Presumption

Ponzi schemes and other investment frauds inevitably end up in bankruptcy or receivership, leaving behind numerous victims—many of whom invested their life savings in the scheme without any knowledge of its fraudulent nature. Although trustees and receivers can sometimes recover some of the fraudulently acquired funds from the assets of the perpetrators, in most cases, those assets fall woefully short of the victims’ losses. This leads to fraudulent transfer lawsuits (claw-back actions) against those who are suspected to have profited from the wrongdoing. A transfer is fraudulent if it was made with the actual intent to defraud, but actual fraud is seldom proven by direct evidence. Generally, to determine whether circumstantial evidence supports an inference of fraud, courts examine certain badges of fraud. While badges of fraud are helpful, the analysis requires individual examination of the specific transaction at issue, the effect of which diminishes the returns to the victims of the fraud because of the substantial costs involved in undertaking such assessments. However, courts nationwide have recognized that simply establishing the existence of a Ponzi scheme is sufficient to prove the perpetrator’s intent to defraud. The presumption provides receivers and trustees with an advantage and shifts the burden of showing the legitimacy of the benefits received to the perpetrator. Courts define Ponzi schemes differently, which creates uncertainty for receivers and trustees who are now required to take over the fraudulent enterprise and recover assets for the victims of the fraud. Expanding the actual fraud presumption beyond classic Ponzi-scheme cases avoids uncertainty and assists receivers and trustees in achieving a final, equitable distribution of assets. The focus should be whether applying the presumption will maximize the return to creditors and victims of the fraud