Commodity Futures Trading Commission v. Walsh, et al. (Distribution Plans – Fairness of Pro-Rata, Net Investment Based Plan)

712 F.3d 735, (2nd Cir. 2013) (April 3, 2013)

Parallel CFTC and SEC enforcement actions were instituted against Ponzi scheme perpetrators who created several entities to offer various investment vehicles for pursuing an index arbitrage strategy to pension funds or investment arms of government entities. The court-appointed receiver for defendants’ assets recommended a plan for an initial pro-rata, net-investment-based distribution of funds recovered from perpetrators and their associated entities. The CFTC’s and SEC’s joint notice of recommendation for a distribution plan stated that the agencies believed that the most fair and equitable method of distribution of the assets held by the receiver was a net investment pro rata distribution plan. The district court approved the plan and ordered the distribution. Various entities defrauded by defendants appealed that order on abuse of discretion grounds, contending the district court should have rejected the proposed plan because fraud victims who chose allegedly safer investments fared no better than victims whose investments were riskier, and because the plan did not provide an adjustment for inflation to compensate longer-term investments. The Second Circuit affirmed the order, holding that the district court did not abuse its discretion in approving the proposed plan, where investors in regulated and unregulated entities were similarly situated in relationship to the fraud, in relationship to losses, in relationship to the perpetrators, and in relationship to the nature of their investments, in what was a uniform Ponzi scheme, where returns for both groups of investors were computed in the same manner, entities were both marketed as being under umbrella of registered investment advisor, perpetrators operated entities as if they were a single entity and entities’ assets were commingled and run as a massive Ponzi scheme for more than a decade.