Monday, November 30, 2015

Claimant Doesn’t Get a Say in Ponzi Scheme Payouts

By Anne Sherry, J.D.

A claimant lacked standing to challenge distributions from the assets remaining after a Ponzi scheme collapsed. The Second Circuit held that the claimant—also the father of the Ponzi perpetrator—could not trace any injury to the authorization of the distributions. Because the district court retains discretionary control over any distribution to the claimant, the sufficiency of the reserve set aside to pay his claim was inapposite (SEC v. Michael Kenwood Capital Management, LLC, November 23, 2015, per curiam).

The Ponzi scheme allegedly spanned five years and resulted in several hundred millions of dollars in losses. The SEC initiated a criminal action and the assets were placed in receivership. The claimant filed claims on the basis that he played an instrumental role in developing two businesses that are part of the receivership estate. In order to achieve a distribution plan and make an initial distribution while these claims were in dispute, the receiver set aside $7.375 million in reserve to pay what he believed was the maximum possible value of the claims.

The claimant argued that the reserve was insufficient and therefore he has standing to challenge the district court’s authorization of distributions to two claimants who he alleges suffered no loss. The Second Circuit disagreed. If the receiver and claimant fail to reach an agreement on the disputed claims, the district court will determine whether they are valid, classify them, and value them. Because the district court has discretionary control over any ultimate distribution, the sufficiency of the reserve is inapposite to whether the claimant has standing to challenge the initial distribution, particularly with $80 million remaining in the receivership estate.

The case is No. 14-4471-cv.