James Walsh's "You can't Cheat an Honest Man"
James Walsh wrote this book in 1998, which is a pity since I would have liked to hear his views on the recent big market ponzi schemes and their meltdown. The book is organized into four sections: how the schemes work, why the schemes work, contemporary extensions, and what to do if you have been scammed.
It is an ambitious book, departing from the usual fare by attending to what specific legal remedies may be available to the individuals who find themselves a part of a ponzi scam. The list of remedies, regulatory action, recevierships, and suing the third party enablers is a good checklist. There are specific jurisdictional remedies that Mr. Walsh overlooks - for example, in Canada one might argue that the ponzi corporation is being run in a fashion by the directors so as to oppress it investors/shareholders. Sometimes, you need to use the legal difference between the corporation and its directors -that they are two different legal entities- as a way of creating legal obligations.
For example, in a nice discussion on third person liablity for receiving money from a ponzi scheme, Walsh points out that a number of courts have found that the players who take out or get paid out from a ponzi scheme are not liable to the rest of the group on theory of negligence, but they may be liable on a theory of restitution. Should the "investors" in a failed ponzi scheme have to repay their "profits"?
Many courts dealing with these issues cite the 1985 federal court decision Johnson v. Studholme as a standard of basic fairness. In the wake of a failed Ponzi scheme, the receiver filed lawsuits against those investors who had received amounts in excess of their contibutions (not just "within" the previous year).
The Johnson court ruled that the investors had given value for the profits they'd received and, so, had not received fraudulant conveyances. The court held that the capital contributions made by the investors and the risk that they could lose all or part of it had been the value provided.
The payment of illusory profits is not a fraudulant conveyance because the capital payment might have been lost, but the operation of a ponzi scheme is always an oppression by a minority of investors on the majority of investors - it is designed to transfer a large amount of wealth from the many to the few. As such, in Canada, it might be recognized as an act of oppression under the Corporation laws, both federally and provincially.
In conclusion, this is a very interesting book on ponzi fraud which will no doubt repay interested readers.
