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Judge Voids Transfers for Duped Ponzi Investors

(CN) - Investors who were fleeced in a $7 million Ponzi scheme can void transfers made to certain "insiders" that profited off the fraud, a federal judge ruled.

Claiming that they lost $57,000 in a Ponzi scheme orchestrated by Lizette Morice and her purported real estate investment firm, Gaddel Enterprises Inc., Thomas Carroll and Kimberly Baker hope to represent a class of 2,800 other investors. They sued William Stettler III and 92 other investors that allegedly reaped more than $5.1 million in proceeds from the scam.

From early 2006 to July 2007, Morice allegedly told mortgage brokers and individual investors that Gaddel purchased foreclosed properties and resold them to large corporations at a profit.

Morice and her colleagues recruited investors at her New Jersey home, in her Pennsylvania and New Jersey offices, and at elaborate black-tie affairs paid for by Gaddel, according to the complaint. Investors were told that they minimum $1,000 contributions would entitle them to a share of its profits since state regulations barred Gaddel from serving as the owner of record for more than a certain number of properties per quarter.

Morice and others allegedly amassed more than $7 million, though no real estate transactions ever took place.

After pleading guilty to seven counts of mail fraud in 2008, Morice was sentenced to 10 years in prison and ordered to pay about $7.3 million in restitution at a rate of $25 per quarter, which will take about 71,500 years.

Carroll and Baker moved for summary judgment against 12 of the defendants and their entities. They demanded return of investment profits that Gaddell allegedly transferred to nine of the investors during the course of the fraud. They also sought the return of investment profits and principal, as well as salaries and commissions, allegedly paid to three so-called insiders named in the suit.

Looking only at the claim against the insiders, U.S. District Judge Mary McLaughlin concentrated on the claims against salaried Gaddel employees Albin Delgado, James Martin and Troy McClain. She refused last week to grant summary judgment against Martin, his wife, McClain, and their respective entities.

Although Martin said in an email that a $1,000 investment could become $1 million in two years, he may have not known of the scheme, according to the ruling.

"Martin's sales pitches and correspondences with Morice aligned with Gaddel's representations in general - that investing small amounts of monies in foreclosed properties can lead to huge returns - and offered no proof that he was privy to any unique knowledge regarding the scheme," McLaughlin wrote. "His understanding that no other investment offered comparable returns is by itself insufficient for the court to presume inquiry notice. A reasonable jury could find that Martin's belief in his employer, however uninformed, was not so unfounded that he should have known it was too good to be true."

The judge also found a genuine dispute as to whether McClain knew of the scheme.

"In an unsworn verification [McClain] submitted to the court, he stated that he had no knowledge of Morice's network of mortgage brokers or corporate contacts," McLaughlin wrote. "He has also recounted in great detail the elaborate galas thrown by Morice and the distinguished guests who attended. He emphasized that many of Gaddel's investors were well-respected in the mortgage industry. It would not be unreasonable for a factfinder to believe McClain's version and to find that he was not on inquiry notice of the scheme."

Delgado and his company, Albinator Enterprises, did not fare as well.

"Without any argument from Delgado, either in the form of a brief in opposition or during oral argument, the court does not have any facts with which to rebut the plaintiffs' contentions against him," McLaughlin wrote.

In 2010, McLauglin refused to dismiss claims against MJD Investments, Michael DeBronzo, Rabbit2007 Inc., and Ian Virgin.

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