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  • Writer's pictureDiana Steen

Receiverships: Winners Can Be Losers and Losers Can Be Winners


The Role of the Receiver


Court appointed Receiverships often are required after businesses and investment funds fail because of fraudulent activity including those stemming from Ponzi schemes. In these schemes, investors are often left holding the bag as victims. The fraudster makes big promises about large and consistent periodic gains to entice investors. Investors are especially vulnerable when the investment opportunity seems abstract or involves new, difficult to understand technology. This was the case with Bernie Madoff and his “split-strike conversion” strategy or more generally with crypto funds promising large returns by taking advantage of unregulated or novel market environments. The court appoints a Receiver to step in the shoes of the failed enterprise to secure all remaining assets, recover additional assets, and coordinate a claims review and distribution process.


Net Winners


In many of these cases, the investor is the victim. In fact, most investors are victims because they are promised returns that they see on paper when they receive their monthly statements and may be relying on the veracity of those statements for fiscal planning. However, certain investors may have benefited from the scheme at the expense of other investors. These investors are called Net Winners. Although that may sound like a good thing, it may result in Receivership litigation where the Receiver may demand that the Net Winner return funds to the Receivership estate to eventually be equally distributed to all investors that lost money.


For example, assume an investor contributed $1 million to an investment fund and subsequently earned $250,000 in fictitious investment returns – this investor would now have a balance of $1,250,000. Now assume that the same investor redeemed the complete amount of $1,250,000. In this scenario, the investor would have reaped a gain of $250,000 even though the earnings were not real. In fact, the earnings are not earnings at all – they likely were paid to the investor using new contribution proceeds from another investor who had not cashed out yet. This would make the investor a $250,000 Net Winner using the net investment method and be subject to clawback litigation by a Receiver to recover the excess amount received above the investors’ original contribution.


Net Losers


Net Losers are in the opposite position. They can file claims with the Receivership estate to recover net unpaid contributions. For example, assume an investor contributed $1 million and earned $250,000 of fictitious gains, but in this scenario never received any redemptions. This investor would be a Net Loser in the amount of $1 million (the actual contribution that was never repaid). Clawback recoveries, including recoveries from Net Winners, add to the assets of the estate and ensure that victims, including Net Losers, can get as much of their lost money back as possible. Unfortunately, Net Losers often are not able to recover 100% of their lost contributions and must hope that the Receiver brings in maximum recoveries so the pennies on the dollar returns are also maximized.


How Pallas Consultants Can Help


Pallas Consultants professionals work with Receivers to analyze Net Winners and Net Losers as well as other clawback recovery opportunities with the goal of maximizing recoveries for all victims.


Pallas Investigations professionals have many diverse skills that help navigate all workstreams associated with Receiverships including the following:

  • Taking control of the operations and/or winding down existing operations

  • Moving fast to preserve and secure all remaining assets and available data

  • Analyzing flow of funds (i.e., answering the question of “where did the money go”)

  • Investigating all recovery targets including both fiat and cryptocurrency assets

  • Determining clawback actions and preparing for settlement or litigation

  • Identifying support for key determinations (e.g., commingling of funds)

  • Proving Ponzi activity and related calculations of net losers and net winners

  • Developing an online claims portal and operating the claims and distribution processes

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