When a Ponzi scheme1 collapses, who should be entitled to the recoverable assets, and what constitutes a “fair” distribution among variously situated investors? Arguably every investor in a Ponzi scheme is a “loser”duped and betrayed by someone who they trusted with their money. But in the wake of the Madoff and other Ponzi-style investment scandals, courts and commentators have struggled to differentiate between “winner” and “loser” investors in order to determine “fair” compensation for victims. What follows is a brief survey of varied approaches to apportioning the pool of recovered assets among the victims.
Customers of collapsed brokerage firms like Madoff’s may attempt to seek recovery by submitting a claim under a Securities Investor Protection Act (SIPA)2 proceeding in federal court. Liquidation of Ponzi scheme operations may also proceed under the Bankruptcy Code, the Commodity Exchange Act, or federal securities laws. Trustees and receivers are responsible for assessing customer claims, and recovering and distributing property. In order to maximize distributions in satisfaction of investor claims, a trustee or receiver may also attempt to “claw back” fictitious profits received by net winners.3
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