SW Legal studies in Business

Federal Bankruptcy Law Does Not Bar Fraud Claims in Ponzi Scheme
Description

Idaho high court held that the victims of a Ponzi scheme had the right to sue another investor in the scheme who earned a profit. They had the right to contend that the transfer of their money by the scheme promoter to another investor was improper. The fact that the scheme operator was bankrupt does not preclude this claim.

Topic Securities Law
Key Words

Ponzi Scheme; Fraudulent Transfer; Bankruptcy

C A S E   S U M M A R Y
Facts

McClung ran a Ponzi scheme. He claimed to be an investment advisor who earned high rates of return. The Christians invested $296,000 with him and lost it. The Idaho Department of Finance shut down the operation. McClung was sentenced to 36 months in federal prison. In bankruptcy proceedings related to the collapse of the scheme, the bankruptcy court awarded the Christians $155,000, but there were insufficient funds. Another investor, Mason, actually made money early in the scheme. On an investment of $166,000, he received $199,000 back from McClung. The Christians sued Mason to recover, contending that he was paid from the funds they invested. They contended that the $33,000 in profits received by McClung were a fraudulent transfer that should be paid back to the Christians. The trial court dismissed the suit; the Christians appealed.

Decision

Vacated and remanded. The trial court held that the matter was settled by the bankruptcy proceedings. That is not correct. The claims made by the Christians under the Idaho Uniform Fraudulent Transfer Act are not preempted by the federal bankruptcy law. Hence, their claims against Mason can proceed to trial.

Citation Christian v. Mason, ---P.3d--- (2009 WL 3353052, Sup. Ct., Idaho, 2009)

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