United States: Ponzi Perspectives: 2023 Midyear Roundup

Since 2021, McGuireWoods' Ponzi Litigation team has been tracking and posting case alerts on Ponzi-related complaints filed in federal and state courts throughout the country and analyzed key decisions that have the potential to influence controlling law on Ponzi-related issues. The blog also posts practical considerations like effective defenses to dismiss Ponzi litigation and common claims brought against financial institutions by defrauded investors. This 2023 mid-year round up summarizes cases and opinions analyzed throughout the first half of the year and highlights trends that we expect in the latter half of 2023.

2023 Ponzi Litigation Includes Significant SEC Enforcement and Civil Litigation Involving Various Ponzi Related Schemes.

Throughout the first half of the year, McGuireWoods summarized over 20 complaints filed in federal and state courts across the country, including 14 federal district courts and 6 state courts. Ponzi litigation continues to grow, and we expect this upward trend to continue throughout the remainder of this year.

Case summaries have included several significant SEC enforcement actions, which we often see spur civil litigation by defrauded investors. Some of the schemes resulting in SEC litigation include:

• SEC v. Engel: Scheme that raised $47 million by convincing members of the Orthodox Jewish community to invest in a security camera installation business and property in Israel when the funds were really being used for personal gain and to make payments to earlier investors.
• SEC v. Ellison-Meade: Scheme that tricked investors into believing they were investing in a club with a proprietary algorithm able to identify stocks poised for growth when the funds were really being misappropriated for personal gain and used to pay earlier investors.
• SEC v. Woodard: Scheme that promoted unregistered promissory note investments, and defrauded investors by misappropriating and misusing investor funds.
• SEC v. Bartlett: Scheme run through a purported toy company recruited investors from a church to purchase promissory notes, stock, and contracts for gold with promises for high return; but in reality, the company functioned as a Ponzi scheme paying earlier investors with the newer funds.

In addition to SEC enforcement actions, complaints this year overwhelmingly include claims of breach of fiduciary duty, breach of contract, unjust enrichment, breach of the duty of good faith and fair dealing, aiding and abetting, and/or negligence or negligent misrepresentation—all common claims brought against financial institutions by defrauded investors. Some of the schemes involving these claims include:

• Tell v. Modica Microindustries, Inc.involved investors who sued a construction company for unjust enrichment, breach of contract, and breach of the duty of good faith and fair dealing, alleging that defendants solicited funds to construct modular homes made from cargo shipping containers, but used the proceeds to fund other projects as part of a Ponzi scheme.
• Sunrise NPL, LLC v. Easy Financial, LLC, et al.  involved investors who brought a claim for fraud, negligence, aiding and abetting fraud, and unjust enrichment against the schemers and title company for losses arising from an alleged Ponzi scheme involved the sale of mortgage loans.
• Abanda v. OurBloc LLC, et al. involved investors who brought a claim for breach of contract, unjust enrichment, and fraud against schemers for losses arising from an alleged Ponzi scheme involving proprietary cryptocurrency tokens that Ponzi victims were encouraged to purchase, the funds thereafter being used to pay yields to earlier investors.

The frequency of these types of claims highlights that defrauded investors—unable to seek redress from insolvent schemers—will continue to seek relief from those with deep pockets, such as the schemers' lawyers, accountants, and financial institutions under theories such as negligence, professional malpractice, and aiding and abetting. For example:

• Warrow v. Turnipseede involved a group of 72 investors who brought claims against the schemers, the schemers' lawyers, and the schemers' accountant for losses arising from a purported bet investment algorithm approved as lawful by the lawyers and substantiated by tax documents prepared by the accountants.

2023 Subject Matter Trends in Ponzi-Litigation Include Cryptocurrency, the Film Industry, Real Estate Transactions, and Retirement Assets.

As predicted in last year's roundup, 2023 has seen a growing number of cases involving cryptocurrency, including schemes run though Bitcoin mining companies, artificial intelligence, tokens, and digital assets like blockchains.

The film industry is another growing subject matter trend–one that we've tracked on the blog since 2021. Examples of these schemes include those run through companies purporting to finance the acquisition of content rights from streaming platforms.

Additionally, there were several schemes involving affinity fraud, a type of fraud targeting members of identifiable groups, such as the elderly, religious persons, or ethnic communities. Some of the schemes involving affinity fraud have impacted the Orthodox Jewish community, the elderly, and parishioners, among others.

2023 Ponzi-Related Decisions Offered A New Cause of Action Recognized in Pennsylvania for Aiding and Abetting Fraud.

As for the decisions tracked by Ponzi Perspectives in 2023, McGuireWoods analyzed Marion, et al. v. Bryn Mawr Trust Co., a Ponzi-related opinion from the Pennsylvania Supreme Court, which recognized that individuals and entities can be liable for aiding and abetting frauds of which they have actual knowledge. While acknowledging that this cause of action targets those individuals and entities adjacent to schemers, the Court noted "[m]any frauds, especially complex commercial frauds, cannot be perpetrated without the active assistance of secondary actors such as accountants, lawyers, bankers, analysts, etc." Additionally, these secondary actors are often an attractive target for litigation for defrauded investors as they are more likely than the schemers (who are typically insolvent) to have the deep pockets necessary to make victims whole.

However, the Court did limit the reach of this new cause of action by rejecting a "should have known standard," instead agreeing with the majority of jurisdictions across the country that actual knowledge is required to establish liability. While it will be difficult for plaintiffs to prove actual knowledge on summary judgment, defendants are not immune from costly discovery and motions practice during the pendency of litigation.