How Can I Get My Money Back After a Ponzi Scheme?
Since the Bernie Madoff scandal grabbed headlines several years ago, investors
have become more aware of what a
Ponzi scheme is and how they operate. While the Madoff scandal was big news, most people
still don’t realize that at any given time in this country, there
are thousands of Ponzi schemes being perpetrated against unsuspecting
Once the scheme itself unravels, as they always do, investors are left
asking themselves, “how can I get my money back?”
What is a Ponzi scheme?
A Ponzi scheme is a fraudulent investment operation that pays “returns”
to investors from their own money, or money paid by later investors, rather
than from an actual earned revenue. These schemes are illegal, and operate
on the “rob Peter to pay Paul” principle as money from new
investors is used to pay off the previous investors.
This continuous and destructive cycle eventually falls apart when not enough
new investors can be found. In my experience, the strongest chance Ponzi
scheme victims have to recover their losses is when the Ponzi schemer
is associated with a registered brokerage firm.
Are brokerage firms liable for Ponzi schemes?
There are two theories under which a brokerage firm might be liable for
its broker’s Ponzi scheme. First, although the firm may claim to
be unaware that one of its brokers is offering unlicensed and unlawful
securities (known as “selling away”), brokerage firms have
an absolute duty to supervise the actions of their brokers.
The brokerage firms can be held responsible for the losses sustained by
victims of the fraud if the firm failed to adequately supervise its broker.
Brokerage firms may not turn a blind eye while their representatives sell
sham investments otherwise run rampant with its customers’ assets.
They have an affirmative duty to implement and operate a robust supervisory
system that adequately monitors and detects this type of misconduct. This
means that a brokerage firm can be forced to pay for the losses you suffered
in a Ponzi scheme, even if the brokerage firm claims it was unaware of
the broker’s misconduct.
The second theory of liability for brokerage firms is under a state’s
securities laws. Every state has its own securities laws and rules often
known as “blue sky laws.” While the laws certainly vary from
state to state, all states require registration of securities offerings,
brokerage firms, and brokers. All states try to prevent fraud. A traditional
Ponzi scheme typically carries multiple state securities law violations,
being that the whole system is a scam, and the securities being sold are
not properly registered with the state.
The question then becomes which parties can be held liable under the state’s
laws that the Ponzi scheme took place. For example, in Ohio, every person
who has participated or aided the seller in any way making a sale that
violates these acts are liable to the purchaser. Some states provide that
if an entity receives any compensation for the fraud, whether directly
or indirectly, that entity may be civilly liable.
It is hard to imagine a scenario where a schemer is able to conduct his
illegal business without using one or more banks or financial institutions.
A financial institution that accepts compensation, ignores red flags,
and is essentially complicit in the scheme, may be held liable under state
securities laws for its aid to the schemer.
Suing the Ponzi Schemer
Many Ponzi scheme victims understandably want to file civil claims directly
against the Ponzi schemer. From a practical standpoint, this approach
often makes little sense. Once Ponzi schemers are discovered, it is usually
the case that the schemer has spent all or most of the money. So while
you could certainly sue the Ponzi schemer, and very likely win a judgment
against them in court, it’s unlikely you’ll recover any money
at the end of the day. In my experience, investors are much more likely
to recover their losses by focusing their cases on the supervising brokerage
firm and other third parties that may be held legally responsible for
the Ponzi schemer’s misconduct and that have the financial ability
to pay a judgment.
Finally, when Ponzi schemes eventually collapse and the perpetrators are
caught, there are usually separate criminal proceedings that are brought
against the Ponzi schemer. There are often separate receivership actions,
in which a court appoints a person called a “receiver” to
gather the Ponzi schemer’s remaining assets. Ultimately, whatever
assets are collected are eventually distributed to creditors, including
investor victims. The receivers typically establish a claims process requiring
victims to prove their losses in a scheme. While these proceedings serve
important purposes, they are generally not intended to make Ponzi scheme
In our experience, Ponzi scheme victims get very little, if any, of their
money back via criminal courts or court-appointed receivers. In most cases,
while it does not hurt to file a claim with the receiver, it likely will
not lead to a full recovery of your losses.
Steps to Take After a Ponzi Scheme
At the end of the day, if you’ve lost money as a result of a Ponzi
scheme, there are a few steps you need to take. First, do not contact
your broker. Anything that you say to your broker may later be used against
you and your potential recovery. Also, it is unlikely that you’ll
get any useful information out of your broker. That is, assuming you can
even reach him or her. Second, gather any
paperwork, checks, correspondence, or other records you have relating to your investments
or any returns from the scheme.
Lastly, you need to contact an experienced securities fraud lawyer. Because
these claims are typically handled through arbitration, rather than through
a classic courtroom trial, the attorney handling your case needs to possess
very specific knowledge and experience in order to obtain a successful
outcome for you. These cases are generally very complex, confusing for
lawyers and investors alike.
If you have been the victim of securities fraud, it is critical that you
are prepared for the unique ins and outs of the
FINRA arbitration process. Contact a securities fraud lawyer at Meyer Wilson for a
free review. David Meyer has provided an article for law students in the American
Bar Association to help them understand the
aftermath of a Ponzi scheme collapse.