11th Circuit Rules That Fraud Victims Cannot Climb To The Top Of The Pile And Get More Back Than Other Victims

The United States Court of Appeals for the Eleventh Circuit has issued a ruling that deals with whether one victim of an economic crime gets to climb to the top of the heap and get more recovery out of the fraudster than the remaining victims. The Court ruled that even when such a victim can trace his money directly into a bank account used by the criminal, such a victim cannot get the money back. Instead, the money goes into the pot, so to speak, and is divided among all victims pro rata.

The case involves two common themes nowadays: Ponzi schemes and forfeiture proceedings that are part of federal criminal prosecutions. As is well known, in a Ponzi scheme, the fraudster takes money from recent investors to pay off those who invested earlier, until the whole thing collapses. Forfeiture is the process by which the government takes from a criminal defendant any money that comes from, is traceable to, or is a substitute for property that is part of the crime itself.

Altogether the defendant had defrauded about $20 million from over 90 people. Just before the defendant’s scheme was discovered, he got one final investor to put in about $2 million. Almost immediately thereafter, the authorities arrested the defendant and seized his bank accounts. The final investor’s $2 million was sitting in the defendant’s bank account. The federal authorities wanted to forfeit the $2 million in the bank account, along with other assets, in order to give the proceeds back to all 90 victims.

The final investor claimed he had a “constructive trust”. In this argument, the last investor said that at the very moment the defendant accepted the final $2 million, it was owed to that last investor, and such a debt is a “superior” and “qualifying” interest under the forfeiture laws. Under such an argument, this means he would get his $2 million off the top from all property seized from the defendant.

The Eleventh Circuit rejected the equitable constructive trust argument from the final investor. The Court said that this issue is controlled by state law, and that Georgia did not recognize such a constructive trust on behalf of the final investor prior to the defendant’s arrest. Instead, the principles of equity require fairness. The Court of Appeals noted that the main idea in forfeiture proceedings is to try to get as much as possible and to treat all victims of fraud equally, so that they each get a pro rata share.

The opinion is available here.