Privy Council Confirms liquidators of Ponzi Scheme cannot re-adjust losses after liquidation: Divergence from US Approach.
The Privy Council has confirmed that losses in a Ponzi scheme should be left ’where they fall’ at the date of liquidation and that it is not the role of liquidators to seek to re-adjust those losses. In a judgment handed down on 16 December, 2019 the Board of the Privy Council held that the law governing the liquidation of Stanford International Bank Limited (SIB) in Antigua and Barbuda does not allow the Liquidators to claw back funds from investors.
SIB was the Antiguan offshore bank used by Alan Stanford to perpetrate the world’s second largest Ponzi scheme, after Madoff. In addition to liquidators being appointed over SIB by the Court in Antigua the US Securities and Exchange Commission also appointed a US Receiver over SIB and other Stanford entities.
This Privy Council decision on SIB follows its 2014 decision on Fairfield v Miagi (2014) in which they also held that the loss falls entirely on those investors whose funds are still invested when the money runs out and the music stops.
This decision means that the Liquidators cannot pursue claims against net winners (those investors who took out more than they put in) or preference creditors (those investors who withdrew funds in the 6 months prior to SIB’s liquidation) and must now release all amounts that the Liquidators have previously held back from preference creditors.
This decision contrasts with the ability of US bankruptcy appointees, including both Madoff and Stanford, to pursue claw backs and re-adjust the losses in a Ponzi scheme scenario. The Madoff Trustee has been very successful in clawing back amounts from net winners and preferences and these recoveries have been a significant reason for the very high recoveries achieved in that bankruptcy estate.
In the liquidation of Fairfield, a BVI liquidation, the liquidators having failed to secure permission to pursue clawbacks via the BVI Court subsequently sought to utilise US clawback powers available to them by virtue of having Chapter 15 recognition. Clearly having the ability to utilise US powers of clawbacks is a valuable tool and given the Privy Council’s decisions on clawbacks we will likely see more attempts by Insolvency Practitioners to access the US powers of clawbacks.
The development of US case law on Ponzi scheme matters combined with US legislation permitting clawbacks in certain circumstances is well developed following a number of high profile Ponzi schemes. Its clear that the US have given considerable thought as to the most equitable approach to the fall out following a Ponzi scheme failure. In a SIB case before the Fifth Circuit Court of Appeals in 2014 in which the Court allowed the US Receiver to pursue claw backs against net winners the Court noted that “for victims of a Ponzi scheme, everyone is a loser and allowing net winners to keep their fraudulent above-market returns in addition to their principal would simply further victimize the true Stanford victims, whose money paid the fraudulent interest”.
The divergence between the US and other countries on this point highlights that Insolvency Practitioners appointed in similar circumstances should give careful consideration to the jurisdictions and laws available to them so as to give themselves the best chance of success in pursuing these claims.
Mark McDonald and Hugh Dickson act as liquidators of Stanford International Bank Limited.