Feinstein ex rel. WML Gryphon Fund LLC v. Long (Standing of Receiver)

2011 WL 3555727 (E.D. Wis. Aug. 11, 2011) (slip copy)

Feinstein ex rel. WML Gryphon Fund LLC v. Long is a useful case because it highlights the limits on a receiver’s standing based on the principal that a receiver stands in the shoes of the receivership entity and can only sue for harm caused to the entity, and not for harm only to investors. Importantly, the court distinguished Scholes v. Lehman, which held that a receiver only has standing to sue on behalf of the receivership entity, but that in Ponzi scheme cases the entity itself is harmed by the diversion of assets from the entity. Scholes v. Lehman, 56 F.3d 750 (7th Cir. 1995). However, Feinstein ex rel. WML Gryphon Fund LLC did not involve a Ponzi scheme, but a poorly managed investment fund where the directors may have received kickbacks in violation of the securities laws. The receiver was attempting to recover funds from investors, who, pursuant to their contracts with the fund withdrew their investments before the receiver was appointed. Because the fund would have no claim against investors who withdrew their money according to their contracts, the receiver had no standing to sue to claw back the withdrawals.