McGuireWoods’ Ponzi Litigation team launched its Ponzi Perspectives blog in early 2021 to track key decisions and new cases in Ponzi civil and criminal litigation. Ponzi Perspectives focuses on cases and decisions that have the potential to influence controlling law on Ponzi-related issues. The blog also offers analysis of key decisions and practical considerations when defending Ponzi litigation. This 2021 year-end round up summarizes the new cases and opinions analyzed throughout the year and highlights the trends that may serve as “coming attractions” of what to expect in 2022.
2021 Ponzi Litigation included Significant SEC Enforcement and Related Cases, Facilitation Claims Against Financial Institutions, and Real Estate and Retirement Schemes.
In Ponzi Perspectives’ inaugural year, McGuireWoods summarized over 35 complaints filed in federal and state courts across the country, including 17 federal district courts and 5 state courts spanning from Massachusetts to California.
Because the SEC filed 7% more enforcement actions in 2021 compared to 2020, these newly filed cases include significant SEC enforcement actions, which often also spurred civil litigation filed by defrauded investors. Some of the schemes involving SEC litigation in 2021 include:
- SEC v. Horwitz: Largest film financing Ponzi scheme in U.S. history ($690 million), which was also the subject of two civil cases filed in 2021 by groups of defrauded investors, Whitmore v. Horwitz and Fiene v. Schweinzger.
- SEC v. Estate of Kenneth J. Casey: Scheme targeting the elderly, which made over $150 million in Ponzi-type payments using investor funds and was the subject of the 2021 civil case Morrison v. Rockwell filed by a group of defrauded investors.
- SEC v. MJ Capital Funding, LLC, et al.: Scheme that tricked investors into believing they were funding merchant cash advances for small businesses. This scheme led to a class action filed by group of investors, Bautista et al. v. Wells Fargo Bank, N.A.
- SEC v. Woods, et al.: Scheme that raised $110 million by defrauding elderly retirees and led to a class action filed by a group of investors, 6694 Dawson Blvd, LLC v. Oppenheimer & Co., Inc.
- SEC v. Bullard: Scheme that utilized close to $500,000 in funds from the Paycheck Protection Program to continue making payments to investors and stay afloat prior to collapse.
In addition to SEC enforcement actions, over a quarter of the new complaints summarized in 2021 included claims of breach of fiduciary duty, aiding and abetting, and/or negligence. The frequency of these types of claims highlights that defrauded investors continue to seek redress from those with deep pockets when a scheme collapses (and the wrongdoers are typically insolvent), such as a bank that provided routine banking services to the schemer. For example:
- Whitmore v. Horwitz involved a group of investors who brought claims for aiding and abetting and breach of fiduciary duty against the bank that schemers used in connection with their film financing scheme;
- Mills v. Trustmark National Bank, et al. involved a receiver who sued a bank for aiding and abetting alleging that it knew or should have known its customer was using an account to operate a Ponzi scheme based solely on the volume of suspicious transactions over the course of years; and
- Surefire Dividend Capital, LP v. Industrial and Commercial Bank of China Financial Services LLC involved an investor who sued a clearing broker that maintained several accounts on behalf of the schemer, alleging a claim of aiding and abetting breach of fiduciary duty.
In terms of subject matter trends in 2021, a number of cases (7) involved investors duped with the promise of high returns on a real estate transaction or investment, including schemes involving residential and commercial real estate, off-campus student housing, timber tracts, and a ski resort. Further, there were several schemes targeting the most vulnerable, the elderly, and/or life insurance proceeds, retirement funds, and other retirement assets. Finally, there was at least one scheme involving the purported sale of cryptocurrency, Lowry, et al. v. Edelman, et al., a largely unregulated area that is quickly growing in popularity and is likely to be continued fodder for Ponzi-related activity in 2022 and beyond.
2021 Ponzi-Related Decisions Offered Insight Into Facilitation Claims and Strategy for Defending Against Them, Scope of Receivers’ Standing, and Emerging Markets for Ponzi Schemes.
As for the decisions tracked by Ponzi Perspectives in 2021, McGuireWoods analyzed Ponzi-related opinions from the Second, Fifth, and Eleventh Circuits, as well as a few federal district courts, which provide guidance to financial institutions defending against Ponzi-related claims.
One of the decisions analyzed from the Second Circuit, Heinert v. Bank of America, N.A., demonstrates the heavy pleading standard a plaintiff faces when alleging that a financial institution aided and abetted a Ponzi scheme and/or breached a fiduciary duty by providing routine banking services. There, the Second Circuit made clear that a plaintiff must allege that the bank had actual knowledge of the purported wrongdoing to survive a motion to dismiss, and constructive knowledge is not enough.
Ponzi Perspectives also analyzed the Southern District of New York’s decision in Anderjaska v. Bank of America, N.A. et al., which demonstrates how procedural tools—such as moving to dismiss for lack of personal jurisdiction—can be valuable in limiting and/or defeating Ponzi claims against national banks in forums where they are neither incorporated nor principally located.
McGuireWoods likewise considered decisions from the Fifth and Eleventh Circuits and the District of Minnesota related to a receiver’s standing to bring claims in the wake of a Ponzi scheme. While the Eleventh Circuit curtailed receivers’ ability to bring Ponzi-related claims on behalf of investors against third party banks in Isaiah v. JPMorgan Chase Bank, N.A., the Fifth Circuit held in Rotstain v. Mendez that receivers do have standing to bring claims on behalf of investors, including a bank, when those claims are dependent on and derivative of the receiver’s claims. Considering these decisions, financial institutions and other third parties that are inevitably swept into the tide of litigation that follows a collapsed Ponzi scheme should carefully consider whether the party bringing the claims has standing to do so.
Finally, Ponzi Perspectives offered strategic and practical considerations in defending against film financing Ponzi litigation in the wake of the collapse of the Horwitz scheme. Ponzi schemes will likely continue to rise in this quickly expanding market, especially as competition between streaming services and demand for streaming content continue to intensify. Banks and financial institutions should be aware of the prevalence of these schemes and risk of getting caught up in civil litigation after a Ponzi scheme collapses because, as demonstrated above, victims will target parties with deep pockets.
McGuireWoods looks forward to continuing to document the legal landscape in civil and criminal Ponzi litigation in Ponzi Perspectives throughout 2022. As always, if you have any questions about these issues or our blog, please reach out to a member of the Ponzi Litigation team.