Ponzi Scheme Receiver Can Go After Transfers
(CN) - Trust directors who withdrew money from a fund manipulated in a $23 million Ponzi scheme must face fraudulent transfer claims a federal judge ruled.
The case involves the Kennett Square, Pa.-based investment advisory company, Acorn Capital Management, run by Donald Anthony Walker Young.
In a 2009 complaint, the Securities and Exchange Commission claimed that Young converted investors' checks - totaling $7.63 million - by having accountants credit his own account instead of Acorn II LP, while transferring $5.4 million more directly into the accounts maintained by him and his wife, Neely.
Young also funneled more than $10 million of the misappropriated funds to pay "profits" to earlier investors, according to the complaint.
Since 1999, the Youngs allegedly used the dough to "support a lavish lifestyle," filled with horse raising and racing, boating, limos, private jets, and a house in Palm Beach, Fla.
A federal judge in Philadelphia appointed Louis Bechtle as receiver to preserve Young's assets to maximize the recovery available to defrauded investors.
Young ultimately admitted to the allegations, and in a related criminal case, he pleaded guilty to charges of mail fraud and money laundering on July 20, 2010.
The court later found Young liable to the tune of $23 million for violating the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940.
Bechtle later sued two of Acorn's limited partners, Diana and William Wister, asserting claims of common law unjust enrichment and fraudulent transfer under the Pennsylvania Uniform Transfer Act (PUFTA).
The receiver alleges that after the Wisters invested $6.5 million on behalf of the Diana S. Wister Charitable Remainder Unitrust in 2004, they withdrew more than 90 percent of the funds on May 8, 2007.
Plus, although the couple invested nearly $11.6 million on behalf of the Margaret Dorrance Strawbridge Foundation II of Pa. between 2004 and 2006, they later withdrew more than $11.8 million, including a final withdrawal of $10 million, according to the complaint.
The Wisters moved to dismiss for failure to state a PUFTA claim, arguing that the complaint contains no facts and circumstances surrounding the alleged fraudulent transfers.
U.S. District Judge John Padova denied the motion on Dec. 20, finding that the complaint alleges the dates and circumstances of the allegedly fraudulent transfers, and that when Young made the transfers to the Wisters, he intended the Acorn II Fund to incur unaffordable debts.
The complaint need not allege fraud under section 5104 of PUFTA, the ruling states.
"The statute, by its own terms, makes clear that the listed badges of fraud are simply factors that 'may be considered' and specifically acknowledges that there are other unenumerated factors that may also be considered," Padova wrote. "Where, as here, the complaint plausibly alleges the existence of a Ponzi scheme, it adequately alleges actual intent to defraud."
Padova also rejected the claim that the Wisters could not have been unjustly enriched because they merely withdrew money that belonged to them.
"The complaint specifically alleges that 'it would be inequitable for the Wisters to retain the benefits ... because those payouts ... from the Acorn II Fund were the product of a Ponzi scheme and were comprised of money paid into the Ponzi scheme by other limited partners,'" Padova wrote. "Indeed, as reflected in the public record of the SEC Action, there were insufficient funds in the Acorn II accounts to cover the amounts owed to investors and, as of April of this year, after significant asset recovery by the receiver and a third distribution of receivership assets, many investors had still only recovered approximately 75 percent of their investments. Accordingly, the receiver has plausibly alleged that the Wisters' recovery and retention of almost their entire principal investment is inequitable vis-à-vis other investors in the Acorn II Fund, who have sustained significant losses on their investments, with some of their investment money having been paid to the Wisters."