SAN FRANCISCO (CN) – An innocent investor must pay back years of investment returns that he earned under a Ponzi scheme run by J.T. Wallenbrock & Associates, the 9th Circuit ruled.
Though Robert Kowell had no idea the operation was a fraud, the court ordered him to disgorge his profits, because they were not based on a legitimate investment.
J.T. Wallenbrock & Associates told 6,000 investors that they were providing working capital to Malaysian latex glove manufacturers by buying accounts receivable for a 20 percent return on investment every 90 days. In reality, Kowell profited from new investors in a classic Ponzi scheme and was an unknowing recipient of Wallenbrock’s fraudulent transfers.
Kowell’s profits were not a “reasonably equivalent” exchange for his initial investment, because the payments were “just cash that was moved around,” Judge Jay Bybee ruled.
Kowell is not entitled to keep his profits under the Uniform Fraudulent Transfer Act, the court ruled.
Court-appointed receiver James H. Donell can recover Kowell’s profits as a means to collect Wallenbrock’s assets for redistribution among injured investors, the panel ruled. Of the 6,000 defrauded investors, only 800 received more than their initial investment, making Kowell liable to other investors. While Kowell was able to keep $18,000 on his initial investment, only owing $26,000 with interest, most investors will recover “pennies on the dollar” of their principal, Bybee wrote.