Are Investor’s Ponzi Scheme Profits Recoverable As Fraudulent Transf...

One of the defenses to a fraudulent transfer action is that the debtor’s transfer in question was for “reasonably equivalent value.” The general rule is that a transfer to repay a loan is a transfer for value because the transferor receives a deduction in the principal and interest owed on the debt.

I read a bankruptcy case involving an alleged fraudulent transfer by the director of a ponzi scheme to one of the investors. The bankruptcy trustee sought to recover money from the investor. The trustee argued that the ponzi scheme’s payments to the investor were fraudulent transfers. The investor, transferee, responded that the payments were not fraudulent because they amounted to amounts due to him pursuant to the investment program and that the payments ere made for value in satisfaction of a debt. The trustee contended that any amounts paid investors as “ponzi profits” in excess of the investors’ original investment are not payments in satisfaction of a debt regardless of what the ponzi program promised.

The court held in favor of the trustee. The court said that any transfers of n investor over and above of the investor’s principal investment for “fictitious profits” are not transfers “for value and may be subject to recovery as a fraudulent transfer. See Memorandum Opinion Denying Motions To Dismiss Case No. 6:07-00761, In re Louis J. Pearlman

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