State Supreme Court rules innocent Ponzi investor can’t keep profits
On a second appeal, the Colorado Supreme Court decided a question of first impression about the Colorado Uniform Fraudulent Transfer Act. According to an opinion released Sept. 17, an innocent investor in an equity-type Ponzi scheme is not entitled to keep any profits from their investment. Because an investor is not guaranteed any profits at all and CUFTA does not include time value of money in its definition of “value,” the court has reasoned in Lewis v. Taylor, the time value of their investment alone does not provide “reasonably equivalent value” in exchange for profits.
The underlying case concerns a court-appointed receiver’s efforts to recover profits from a multi-million-dollar hedge fund that turned out to be a Ponzi scheme. Manager Sean Mueller used money from new investments rather than any actual profits to pay out withdrawals to investors. This case’s defendant, Steve Taylor, invested $3 million and withdrew that initial investment plus an additional $487,305.29.
After the fund’s collapse, the trial court appointed plaintiff C. Randel Lewis as a receiver to collect and distribute assets among investors who lost money. Lewis sued Taylor under section 38-8-105(1)(a) of CUFTA to recover Taylor’s gains from the fund.
At the heart of the parties’ dispute is one part of a two-prong affirmative defense CUFTA provides. Under the statute, a “transfer . . . is not voidable under section 38-8-105(1)(a) against a person who took in good faith and for a reasonably equivalent value.” Lewis and Taylor do not dispute that transfers from the hedge fund were fraudulent or that Taylor withdrew his money in good faith as an innocent investor. In question is whether Taylor provided reasonably equivalent value in exchange for his withdrawal over his initial $3 million investment.
Under the law, Taylor is entitled to keep his base investment. Taylor has argued he is also entitled to some money beyond his initial $3 million, because regardless of whether the hedge fund was fraudulent or not, his money sitting in the fund for over a year carries time value.
But the trial court granted summary judgment in favor of Lewis, concluding Taylor did not provide reasonably equivalent value in exchange for his gain withdrawal. The Court of Appeals reversed the decision in 2017, concluding the trial court made a mistake by not considering the time value of Taylor’s $3 million investment when determining whether he provided reasonably equivalent value in exchange for his profits. The appeals court remanded for further fact-finding by the trial court.
In its reversal, the Supreme Court concluded CUFTA does not include time value of money in its definition of “value,” although the statute does not specifically define “reasonably equivalent value.” The court based its interpretation on the difference between equity investments and other types that come with contractual returns, such as interest payments.
According to the statute, value is given for a transfer if property is transferred or an antecedent debt is secured or satisfied.
“We note that the statutory scheme does not identify the time value of money as a source of value,” wrote Justice William Hood in the opinion. “Had the legislature wanted to make the affirmative defense sweep so broadly, it could have done so explicitly.” Hood added that because equity investors do not have a guarantee of any return at all, even for the time value of their investments, investors who withdraw gains on their investment have not provided any value in exchange.
“In these circumstances, he provides no property that actually yields any true profit,” the opinion reads. “And in paying the investor more than he invested, the Ponzi schemer doesn’t satisfy an antecedent debt or a claim that the investor has because the investor has no right to any return on investment. Thus, CUFTA does not define ‘value’ to include the time value of money.”