SEC v. GPB Capital Holdings, LLC, et al. was filed in the Eastern District of New York on February 4, 2021 by the SEC, alleging violations of federal law in connection with the defendants’ investment business, which allegedly raised over $1.7 billion from more than 17,000 investors. Specifically, the complaint alleges that the defendants violated the Investment Advisers Act, the Securities Act, and the Exchange Act, along with corresponding regulations.
February 3, 2021 – Rotstain v. Mendez, 2021 WL 359989 (5th Cir.)
On February 3, 2021, the United States Court of Appeals for the Fifth Circuit issued an opinion in Rotstain v. Mendez, holding in part that a receiver had standing to bring claims on behalf of investors in connection with a Ponzi scheme.
In the context of denying a motion to intervene, Rotstain clarified that receivers and their assignees have standing to bring claims on behalf of investors when the investors’ claims are against alleged conspirators for conduct in furtherance of that scheme and are derivative of and dependent on the claims of the receivership estate.
Commodity Futures Trading Commission v. Jeremy Spence was filed in the Southern District of New York on January 26, 2021 by the CFTC, alleging violations of the Commodity Exchange Act and corresponding commission regulations. Specifically, the complaint alleges fraud by deceptive device or contrivance for acts perpetrated by the unregistered defendant.
Lovatt, et al. v. Sendera Ranch A2A Developments, LLC, et al. was filed in Texas state court on January 26, 2021, claiming over $1 million in relief for breach of contract and fraudulent conveyance in the course of an alleged Ponzi scheme.
November 13. 2020 – Heinert v. Bank of America, N.A., 2020 WL 6689287 (2d Cir.)
On November 13, 2020, the United States Court of Appeals for the Second Circuit issued an opinion in Heinert v. Bank of America, N.A. imposing a heavy pleading burden upon plaintiffs seeking to sue banks for the facilitation of a Ponzi scheme.
As the recession deepens, Ponzi schemes that benefitted from a thriving pre-pandemic economy are likely to collapse. While investors may pursue claims against the fraudsters themselves, these suits are unlikely to yield meaningful recovery as Ponzi schemes are frequently operated by judgment-proof shell entities. As a result, investors may look to deep-pocketed financial institutions to recoup their losses. Indeed, banks are a frequent target of Ponzi-scheme related aiding and abetting claims. These claims can present significant exposure risks to banks if they survive a motion to dismiss. Heinert shields banks from some of those risks by setting a high bar for pleading a key element of an aiding and abetting claim—actual knowledge of the underlying scheme.
June 1, 2020 – Isaiah v. JPMorgan Chase Bank, N.A., 960 F.3d 1296 (11th Cir.)
On June 1, 2020, the U.S. Court of Appeals for the 11th Circuit issued Isaiah v. JPMorgan Chase Bank, N.A., a precedential opinion that draws sharp limits on court-appointed receivers’ ability to bring claims against financial institutions that provided banking services to customers later discovered to be running a Ponzi scheme.
As the economy transitions from its nearly decade-long bull run to a swift and unanticipated recession, Ponzi schemes previously kept afloat by investments of new money are likely to collapse as investors seek to withdraw their principal. When these schemes collapse, investors often sue the companies created by the fraudsters in an attempt to recoup their investments. Because these companies are often nothing more than sham fronts with no assets of their own, state courts appoint receivers and empower them to bring litigation to marshal the companies’ assets to satisfy judgments for creditors. These receivers, in turn, frequently bring claims against the banks utilized by the fraudsters. Such lawsuits present significant exposure for financial institutions, as large-scale Ponzi schemes can involve the movement of tens or even hundreds of millions of dollars through bank accounts set up by the schemers.