Ponzi Schemes and Clawbacks: Investors Pay Twice for the Crimes of Others
The pain felt by duped investors in Ponzi schemes may only be the beginning. When a scheme collapses, the perpetrator is naturally the first stop in the effort to recapture the misdirected investor money – but it's not the only stop. Bankruptcy Code provisions known as "clawbacks" allow bankruptcy trustees to seek the return of funds distributed to investors, even from those who were fortunate enough to have turned a profit or redeemed their investments before the schemes unraveled. This article explains the clawback rules and the two provisions they rely on: the preferential transfer theory and the fraudulent transfer theory.