3M Cannot Recover Losses in Ponzi Scheme

(CN) - 3M did not own the earnings made on its investments in a Ponzi scheme, and so cannot recover its loses from insurers, a federal judge ruled.

Operating out of St. Paul, Minn., 3M is a multinational conglomerate with more than 55,000 medical and industrial products. It is ranked No. 101 on the Fortune 500 list, with revenues in 2013 of $31 billion.

3M began investing its employee-benefit plan assets in the WG Trading Company in 1999, but the firm turned out to be a huge Ponzi scheme, the ruling says.

WG Trading principals Stephen Walsh and Paul Greenwood were indicted in 2009 for diverting hundreds of millions of investors' dollars for their own personal use and to conceal their fraud.

Fortunately, 3M was able to recover all of the money it invested during the receivership process.

But the company was unsatisfied with merely a full recovery of its principal. It claimed in Federal Court that some of its money was legitimately invested, and it should be paid earnings on these investments.

"3M argues that, with the help of forensic accountants, it can 'untangle' the massive Ponzi scheme operated by Walsh and Greenwood and quantify the amount of legitimate earnings that it lost on account of their fraud," U.S. District Judge Patrick Schiltz wrote.

"Every neutral observer who has been involved in this matter - including the receiver, the CFTC, the SEC, the United States District Court for the Southern District of New York, and the Second Circuit - appears to believe that what 3M proposes to do is impossible."

However, regardless of whether or not untangling WG Trading's accounting would be possible, Schiltz said 3M's loss of earnings is not covered under its insurance policies.

"The Court agrees with National Union that what 3M owned was a limited-partnership interest in WG Trading. Up until the point at which earnings were distributed to the partners, the earnings of WG Trading were owned by WG Trading, and not by 3M or any of the other limited partners," Schiltz said.

While 3M had the right to receive distributions from the partnership, it did not own any specific earnings or property.

"3M cites no authority for the proposition that, before the earnings were distributed, 3M had the right to possess those earnings or exercise any of the other traditional attributes of ownership over those earnings," the 24-page opinion states. (Emphasis in original.)

Therefore, 3M's insurers are not obligated to compensate 3M for a loss when it never possessed the earnings to begin with.

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