The collapse of a Ponzi scheme usually follows a familiar pattern. When the scheme is exposed, the company created by the schemer—which is usually little more than a sham entity—is placed into receivership or declares bankruptcy (or both). A receiver or bankruptcy trustee is then tasked with recovering any funds belonging to the estate so that they may be distributed to creditors. As part of this process, these court-appointed parties step into the shoes of the company and may bring any litigation that the company itself could have brought. Bankruptcy trustees are also granted the exclusive right to bring “general claims” on behalf of the entities’ creditors.
This process creates a thorny question: who may seek recovery from a third party alleged to have been involved in the fraud? Creditors that lent funds to sham companies often pursue claims against financial institutions that banked the schemers on aiding-and-abetting theories. Yet receivers and trustees also often bring these claims, leading to duplicative litigation and the question of who properly “owns” the claim.
A recent decision by the U.S. District Court for the District of Minnesota provides important guidance on this question. Ritchie v. JPMorgan Chase & Co., No. 14-cv-04786, 2021 WL 2686079 (D. Minn. June 30, 2021) untangles who has standing to bring claims against a third party alleged to have aided and abetted a Ponzi scheme. As the Court explains, “general” claims for loss of funds belong exclusively to court-appointed bankruptcy trustees. Third parties may only bring particularized claims that arise from injuries “directly traceable” to the defendant’s conduct. Ritchie thus serves as a touchstone in disputes over standing in Ponzi litigation.