How to Recover Funds from a Ponzi Scheme
The Wall Street Journal, paid subscription, has a very interesting story on failed hedge funds, WSJ.com - Failed Hedge Fund Haunts Celebrities.
According to the story, "A trustee liquidating Bayou Management LLC, a failed Connecticut hedge fund, is attempting to reclaim more than $100 million from investors, including a fund called Sterling Stamos in which the owner of the New York Mets baseball team, Fred Wilpon, has a stake. In a separate matter, a Long Island family is suing several fellow investors in a bogus hedge fund called Sterling Watters. Among defendants: a former official of the Securities and Exchange Commission. Those cases, like the Lipper case, are pending in state Supreme Court in Manhattan. Individuals who profited "should be sharing the pain," says Jeff Marwil, the federal trustee in charge of liquidating Bayou. "Our goal is to equalize in a fair and equitable fashion."
The basic legal theory here is restitution: those individuals who obtained benefits from a ponzis scheme, received a benefit which was mistakenly conferred upon them - the mistake being that the hedge fund was was solvent at the time it made the distribution. Ponzi schemes are insolvent from the get go, and any transfer of money from the later investors to the earlier investors is under the mistake, induced by the schemers, that scheme is solvent. There was no intention of the transferor to gift his or her money to the transferee, and so the proper legal theory for the later investors to recover their money from the earlier investors is restitution: restitution does not require that the transferee committed a wrong in obtaining the money, only that it would be wrong for the transferee to retain the money.
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