When a massive Ponzi scheme such as that of Tom Petters or Trevor Cook is uncovered, the criminal prosecution usually attracts the most public attention. However, the civil consequences of such massive fraud often take far longer to be resolved, and victims may be faced with a bewildering array of court proceedings.
Business litigation arising from these fraud cases often must deal with and respond to bankruptcy filed by the criminals responsible for the fraud scheme. Often, such responses also involve the bankruptcy trustee.
Defrauded investors obviously seek as much reimbursement as they can get, and one of the legal theories they can pursue is called a "clawback." When a Ponzi scheme or other financial fraud has led to a bankruptcy filing, a clawback lawsuit seeks to recover profits arising from the illegal activity, not from the party responsible for the fraud, but from investors, employees, or other parties receiving proceeds from the fraud.
In order to claw back such proceeds, it must be shown that the investor, employee or other party knew or should have known that the "profits" were made through fraud. If that can be proven, then all of the money that a party received from the Ponzi scheme can potentially be recovered. This can even include proceeds donated to charities.
Petters Clawback Cases
The claws are now out in force in the Petters case.
Doug Kelley, the bankruptcy trustee for the Petters bankruptcy, has recently sought to claw back hundreds of millions of dollars from a host of investors in the Petters Ponzi scheme, as well as from other parties. A team of attorneys working on Kelley's behalf has filed over 100 lawsuits seeking the return of money that is allegedly tainted by the Petters fraud. The defendants in these cases include many different individuals and institutions that had dealings with Petters and his businesses.
As an example, Kelley recently filed a clawback lawsuit to seek at least $323 million from a Chicago hedge fund. This suit comes on the heels of a lawsuit filed to recover $137.7 million and as much as $2.5 billion from the Sabes family and associated companies. These two suits are, in a sense, only the tip of the iceberg. The question is whether it can be shown that these parties had reason to believe that Petters' operation was fraudulent.
Legal commentators are following the Petters clawback cases with great interest. On the one hand, it has long been established that bankruptcy courts can go after ill-gotten gains. Those attempts, however, have typically not gone much beyond the defendant and the bankrupt estate - until now. But the sheer size and scope of a case like Petters means that untangling the claims of victims and creditors could take many years to resolve.
If you should have any questions regarding bankruptcy or clawback lawsuits, please contact one of the experienced attorneys at Burns & Hansen, P.A.