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Monday, July 22, 2024 | Back issues
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Ponzi Scheme Victims Lose Recovery Protest

(CN) - The court-appointed receiver of a $1.3 billion Ponzi scheme correctly apportioned the $815 million in recovered funds instead of favoring certain investors, the 2nd Circuit ruled.

Steven Walsh, 67, of Sands Point, N.Y., and Paul Greenwood, 64, of North Salem, N.Y, pleaded guilty in 2010 to federal charges of securities fraud, wire fraud, commodities fraud, conspiracy and money laundering. For at least 13 years, the men ran the scheme by selling investments for an index arbitrage strategy through several entities, including Westridge Capital Management Inc., WG Trading Company LP and WG Trading Investors LP.

The Securities and Exchange Commission and the Commodity Futures Trading Commission had filed a federal complaint against the men in February 2009, seeking disgorgement of illegal progits. The court later appointed Los Angeles-based Robb Evans & Associates LLC as receiver.

Upon that appointment, a group of victims who were limited partners in WGTC and who were not associated with Greenwood and Walsh urged the court give them the $807 million in their capital accounts.

This move would leave only $8 million for WGTI investors, including several 3M Employee Welfare Benefit trusts, the Blue Cross and Blue Shield Association National Retirement Trust, and the San Diego County Employees Retirement Association.

The limited WGTC partners argued first that they should get a larger payout than investors in the unregulated WGTI who had opted to deal in riskier entities. They said it would be unfair to compensate WGTI investors in the same manner as investors who sought safer investments.

Second, the partners argued that the distribution should favor longer-term investors by adjusting for inflation.

Rejecting those proposals, a federal judge in Manhattan approved the receiver's plan for a pro rata distribution that took place in April 2011.

A three-judge panel of the 2nd Circuit affirmed Wednesday, finding that investors in both entities were similarly situated.

"First, the record does not support the 3M Group's characterization of the district court as adopting a principle that all investors are similarly situated 'merely' when all have been defrauded," Judge Amalya Kearse wrote for the panel. "Rather, the court stated that victims may properly be considered similarly situated for purposes of a pro rata distribution plan when they 'were similarly situated in relationship to the fraud, in relationship to the losses, in relationship to the fraudsters, and in relationship to the nature of their investments,' in what 'clearly was a uniform Ponzi scheme.'"

There is no indication that the lower court ignored the argument that investors in unregulated WGTI deserve less compensation, according to the 35-page decision.

"Although the 3M Group characterizes its members as having prudently 'chose[n] the protections of regulation,' they chose protections that were designed not for their benefit but for the benefit of others," Kearse wrote. "We see no error in the district court's determination that the mere choices of different investment vehicles did not mean that the two groups of defrauded investors in this case were meaningfully dissimilar, given, inter alia, that both the WGTI and WGTC investors 'lost money because [they] were defrauded by the same individual who stole [their] money,' and no one, whether they had invested in the regulated or the unregulated entity, 'could find out for a decade."

Pro rata distribution is not beyond the range of permissible decisions, the court found.

"Under the receiver's pro rata distribution plan, each member of the 3M Group, like each WGTI investor, was to receive approximately 85% of the net amount it had invested," Kearse wrote. "Giving the 3M Group any of the premiums it requested would have meant that the distributions to the other fraud victims would be reduced to 64-76% of their net investments, while the 3M Group members would receive more money than they had invested - their largest requested premium presenting them with a profit of nearly 40%. It was well within the district court's discretion to conclude that, as a matter of equity, some of the similarly situated victims should not profit at the expense of the other victims."

Between 1996 and 2003, WGTC advanced the Greenwood and Walsh approximately $36 million. From 2002 to 2009, WGTI paid a company owned by Greenwood's wife $22 million for the maintenance of the company's 286.2-acre horse farm in Brewster, N.Y., and its 92 hunter ponies.

"In addition, Greenwood and Walsh had a WGTC employee transfer money - ultimately totaling hundreds of millions of dollar - directly from WGTI to the personal bank accounts of Greenwood and Walsh and to third parties to cover their personal expenditures," the opinion states. "The personal expenses funded by these transfers included payments to Walsh's ex-wife totaling nearly $20 million; more than $10 million for Greenwood's wife's hunter-pony farm; and Greenwood's purchase, for more than $3 million, of a collection of 1,348 teddy bears."

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