Summary Proceedings Denied Investors Due Process in Ponzi Scheme Receivership Case

(CN) – The 11th Circuit Court of Appeals ruledin favor of investors who claimed they were denied due process to challenge the decisions of a receiver appointed over a Ponzi scheme dismantled by the Securities and Exchange Commission.

The initial action was brought by the SEC in 2015 against Credit National Capital LLC (CN Capital) and the scheme’s organizer, James Torchia. The SEC claimed that Torchia’s scheme involved the use of CN Capital and its investors to purchase life insurance policies. Torchia then used Credit National Acceptance LLC to sell promissory notes that had interests in the life insurance policies acquired by CN Capital using the funds from CN Acceptance to cover CN Capital’s costs, according to the ruling.

After the district court froze CN Capital’s assets in 2016, it appointed a receiver to oversee repayment to the victims and collection of fictitious profits.

The receiver found that CN Capital had three categories of investors including those who loaned funds CN Capital in return for a promissory note, investors who bought insurance policies as sole beneficiaries, and investors with “fractional interests in insurance policies where CN Capital was the beneficiary,” according to the 24-page ruling.

The receiver’s recovery focused primarily on the division of investors into these subclasses, according to District Judge William T. Moore’s ruling.

Katherine and Richard Sutherland were two such direct investors and the beneficiaries of a life insurance policy. The receiver demanded that the Sutherlands either assign the policy to him or remit more than $25,000 in fictitious profits. The receiver claimed a certain amount was paid by CN Capital but did not explain how he calculated the “fair market value of other services,” according to the ruling.

“The receiver did not submit any evidence to the district court justifying his determination that the Sutherlands were obligated to remit fictitious profits or supporting his calculations of the fictitious profits,” Judge Moore wrote.

Investors affected by CN Capital’s Ponzi scheme claimed on appeal the district court denied them a chance to meaningfully challenge the receiver’s findings.

“The Sutherlands were not permitted discovery on the receiver’s determinations and calculations,” the opinion states. “Nor… were they allowed to fully present their claims or defenses to dispute the receiver’s fictitious profits claim.”

The panel reversed the district court’s ruling finding the court provided insufficient process to the scheme’s victims to challenge the receiver’s assessment.

“The summary proceedings in this case provided insufficient process to” the scheme’s investors, the court found, remanding the case back to the district court.

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