As Ponzi schemes and financial frauds become more commonplace, issues regarding restitution and whose claims should be paid first become more complex.
Obviously, if the receiver or lawyers find sufficient assets, everyone gets paid. Those cases are the rare exception, however.
So what should a judge do when multiple creditors race to the courthouse fighting over a limited amount of assets?
These dilemmas arise daily. Defrauded investors and secured creditors argue as to which claims should be paid first. And increasingly, courts are being asked to decide whether the lucky few that might have already been paid should disgorge some of their monies (search “clawback” in the article index for more information.)
Today, there is no clear cut answer. Case law is slowly emerging but it may take years before any bright line rules emerge.
Take the case of Marc Drier, one of the largest U.S. fraud cases in 2008. Drier was a lawyer and named partner of a prominent New York law firm. Prior to his arrest in 2008, Drier was running an elaborate Ponzi scheme using the law firm as a front. He sold $700 million of promissory notes to institutional investors, primarily banks.
The court determined that creditors such as the banks should get paid first. Fair? Don’t ask Paul Gardi, a former Drier client who was claims he was a client of Drier and a victim of his fraud too.
According to court papers, Gardi was an average client. Just two months before his arrest, Drier told Gardi that he settled Gardi’s case for $6.3 million.
Did Gardi see any money? No. Unbeknownst to Gardi, Drier had forged Gardi’s signature and had the settlement funds into his own account. Gardi did not see a penny.
Who should get paid first? Secured lenders? Creditors? Client victims? Former law firm employees with unpaid wages? How can you even tell who is a creditor and who is a victim? These are the thorny questions that arise every day.
Obviously, if you are the victim of a fraud a competent asset recovery lawyer can help you get back your money. In an area of law as complex as asset recovery, a good lawyer is necessary to also help you keep what you win from late arriving creditors or receivers who want to clawback whatever you may have collected.