perkins v. haines - s.e.c.'s amicus brief

8/3/2019 Perkins v. Haines - S.E.C.'s Amicus Brief

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No. 10-10683-BB__________________________________________________________________

UNITED STATES COURT OF APPEALSFOR THE ELEVENTH CIRCUIT

__________________________________________________________________WILLIAM F. PERKINS, PLAN TRUSTEE FOR INTERNATIONAL

MANAGEMENT ASSOCIATES, LLCAppellant

v.AENA Y. HAINES, ET AL,

Appellees__________________________________________________________________

On Direct Appeal from the United States Bankruptcy Court for the Northern

District of Georgia, Atlanta Division__________________________________________________________________

BRIEF OF THE SECURITIES AND EXCHANGE COMMISSION, AMICUS

CURIAE, IN SUPPORT OF APPELLEES AND AFFIRMANCE OF THE

ORDER OF THE BANKRUPTCY COURT

__________________________________________________________________

DAVID M. BECKERGeneral Counsel

MARK D. CAHNDeputy General Counsel

JACOB H. STILLMANSolicitor

KATHARINE B. GRESHAMAssistant General Counsel

MORGAN BRADYLYONSAttorneySecurities and Exchange Commission

100 F. Street, NEWashington, DC 20549(202) 551-7926 (Bradylyons)

Case: 10-10683 Date Filed: 07/08/2010 Page: 1 of 35


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William F. Perkins v. Haines, et al; Docket No. 10-10683-BB

CERTIFICATE OF INTERESTED PERSONS AND CORPORATE

DISCLOSURE STATEMENT

The Certificate of Interested Persons and Corporate Disclosure Statement

filed with the Brief of Appellant William F. Perkins, Plan Trustee for International

Management Associates, LLC, as supplemented by the Certificate of Interested

Persons and Corporate Disclosure Statement filed with the Brief of Defendants-

Appellees, should also include:

Becker, David M.

Cahn, Mark D.

Gresham, Katharine B.

Stillman, Jacob H.

C-1 of 1



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TABLE OF CONTENTS

Page

CERTIFICATE OF INTERESTED PERSONS AND

CORPORATE DISCLOSURE STATEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . C-1

TABLE OF CITATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii

INTEREST OF THE SECURITIES AND EXCHANGE COMMISSION . . . . . 1

STATEMENT OF THE ISSUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

FACTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

SUMMARY OF ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

The bankruptcy court correctly determined that the general

rule in Ponzi schemes applies whether an investment involves

equity or debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

A. Investors with equity interests in an entity

operated as a Ponzi scheme give value for transfers up

to the amount of principal invested for purposes of

the affirmative defense to a fraudulent transfer action. . . . . . . . . . . 9



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TABLE OF CONTENTS (Continued)

Page

B. Policy reasons support the view that there should be

no distinction between debt and equity in the context

of an action to recover principal payments in a Ponzi

scheme case. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

C. The Trustees arguments about the differences between

debt and equity are not persuasive in the Ponzi scheme

context. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

CERTIFICATE OF COMPLIANCE

CERTIFICATE OF SERVICE



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TABLE OF CITATIONS

CASES Page

Alexander v. Albright (In re Terry Manufacturing Co., Inc.),

Nos. 03-32063, 05-3050, 2007 WL 274319 (Bankr.

M.D. Ala. Jan. 25, 2007) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23-24

American Broadcasting Systems, Inc. v. Nugent

(In re Betacom of Phoenix,Inc.), 240 F.3d 823 (9th Cir. 2001) . . . . . . . . 22

*Barclay v. Mackenzie (In re AFI Holding, Inc.),

525 F.3d 700 (9th Cir. 2008) . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 13-15, 20

Bayou Superfund, LLC v. WAM Long/Short Fund II, L.P.

(In re Bayou Group,LLC), 362 B.R. 624 (Bankr. S.D.N.Y. 2007) . . . 13, 20

Dicello v. Jenkins (In re International Loan Network, Inc.),

160 B.R. 1 (Bankr. D.D.C. 1993) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

*Donell v. Kowell, 533 F.3d 762 (9th Cir. 2008), cert. denied,

129 S. Ct. 640 (2008) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-13, 16, 19-20

Eby v. Ashley, 1 F.2d 971 (4th Cir. 1924), cert. denied,

266 U.S. 631 (1925) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15-16



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TABLE OF CITATIONS (Continued)

Page

Fisher v. Sellis (In re Lake States Commodities, Inc.),

253 B.R. 866 (Bankr. N.D. Ill. 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

*Merrill v. Abbott (In re Independent Clearing House Co.),

77 B.R. 843 (D. Utah 1987) . . . . . . . . . . . . . . . . . . . . . . . . 10, 12, 17-18, 20

*Wyle v. C.H. Rider & Family (In re United Energy Corp.),

944 F.2d 589 (9th Cir. 1991) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16-17, 24

STATUTES AND RULES

Bankruptcy Code, 11 U.S.C. 101, et seq.

Section 101(5)(A), 11 U.S.C. 101(5)(A) . . . . . . . . . . . . . . . . . . . . . . . . . 12

Section 101(12), 11 U.S.C. 101(12) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Section 544(b)(1), 11 U.S.C. 544(b)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Section 548, 11 U.S.C. 548 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Section 548(a)(1)(A), 11 U.S.C. 548(a)(1)(A) . . . . . . . . . . . . . . . . . . 9-11

Section 548(a)(1)(B), 11 U.S.C. 548(a)(1)(B) . . . . . . . . . . . . . . . . . . . . . 10

Sections 548(a)(1)(B)(i)-(ii)(I), 11 U.S.C. 548(a)(1)(B)(i)-(ii)(I) . . . . . 10

Section 548(c), 11 U.S.C. 548(c) . . . . . . . . . . . . . . . . . . . 3, 5-6, 10-11, 13

Section 548(d)(2)(A), 11 U.S.C. 548(d)(2)(A) . . . . . . . . . . . . . . . . . 11-12



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TABLE OF CITATIONS (Continued)

Page

Bankruptcy Abuse Prevention and Consumer Protection Act of 2005,

Pub. L. No. 109-8, 1402(1), 119 Stat. 23 . . . . . . . . . . . . . . . . . . . . . . . . . 10

Sections 19 and 20 of the Securities Act of 1933, 15 U.S.C. 77s, 77t . . . . . . . . . . 1

Section 21 of the Securities Exchange Act of 1934, 15 U.S.C. 78u . . . . . . . . . . . . 1

Fed. R. App. P. 29(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Georgia Code Annotated

Ga. Code Ann. 18-2-73(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Ga. Code Ann. 18-2-74(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Ga. Code Ann. 18-2-75(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Ga. Code Ann. 18-2-77(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Ga. Code Ann. 18-2-78 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Ga. Code Ann. 18-2-78(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Ga. Code Ann. 18-2-78(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Ga. Code Ann. 18-2-79 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11



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INTEREST OF THE SECURITIES AND EXCHANGE COMMISSION

The Securities and Exchange Commission is the agency principally

responsible for the enforcement of the federal securities laws and the protection of

the investing public. See Sections 19 and 20 of the Securities Act of 1933, 15

U.S.C. 77s, 77t; Section 21 of the Securities Exchange Act of 1934, 15 U.S.C.

78u. This appeal was taken from an order in the bankruptcy of International

Management Associates, LLC (IMA), denying partial summary judgment with

respect to fraudulent transfer actions brought by the Trustee, who had previously

been the receiver in a Commission securities fraud enforcement action against

IMA.

The Trustee is seeking to recover payments made to investors by IMA prior

to the collapse of IMA, which the Trustee alleges was operating a Ponzi scheme

through several affiliated hedge funds. As a general rule, innocent investors in

Ponzi schemes have a good faith-for value defense against fraudulent transfer

actions to recover their investment principal. The Trustee contends, however, that

because the IMA investors had worthless equity, rather than debt, interests in the

hedge funds, they cannot establish that they gave value for payments they

received. The bankruptcy court rejected the Trustees argument, holding that the

existence of a fraud claim arising from the investment, not the form of the



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investment, is the relevant consideration in determining if investors gave value.

(Order Den. Trustees Mot. for Partial Summ. J. 12, Dec. 1, 2009.) The Trustee

appealed.

The Commission submits this amicus curiae brief, pursuant to Fed. R. App.

P. 29(a), to address the important legal question raised by the Trustees appeal:

whether equity investors in a fraudulent scheme can establish that they gave

value in exchange for payments up to their principal amounts because they held

claims based on fraudulent inducement arising from their initial investment.

The answer to this question will have a significant impact on the treatment of

investors defrauded by Ponzi schemes purporting to offer equity investments.

The Commission believes that the Trustees view is contrary to long-

established legal principles governing the recovery of payments received by

investors prior to the collapse of a Ponzi scheme. Moreover, as a policy matter, it

should make no difference whether investors are defrauded by Ponzi schemes that

purport to offer debt securities or Ponzi schemes that purport to offer equity

securities.



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STATEMENT OF THE ISSUES

Section 548(c) of the Bankruptcy Code and similar state laws provide a

defense to fraudulent transfer actions to those who took for value and in good

faith. In the Ponzi scheme context, courts generally find that defrauded investors

gave value for transfers up to their principal amounts because the investors had

restitution or rescission claims that were satisfied to the extent of the transfers they

received. For the purposes of this appeal, it is assumed that the investor

defendants were fraudulently induced to invest as equity holders in a Ponzi

scheme and that they received transfers purportedly in exchange for tendering

their equity interests to IMA. The question presented is whether they gave value

for purposes of this defense.



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1/ The court entered a default judgment as to Wright after he failed to answer

the complaint, enjoining him from committing further violations andordering him to pay $17,019,510 in disgorgement, $2,786,399 in

prejudgment interest, and a $120,000 penalty.

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FACTS

A. The Commissions Enforcement Action

In February 2006, the Commission filed a complaint alleging a fraudulent

offering involving investments in a group of hedge funds run by promoter Kirk

Wright and two investment advisers he controlled International Management

Associates, LLC and International Management Associates Advisory Group, LLC.

1/ The complaint alleged that, over a period of about nine years, the defendants

raised approximately $150 million from about 500 investors in the hedge funds,

which were organized as limited liability companies and limited partnerships.

B. The Bankruptcy Filing and the Fraudulent Transfer Actions

A month after the Commission filed its complaint, IMA and its affiliated

funds filed voluntary petitions for relief under the Bankruptcy Code. Thereafter,

the Trustee filed 108 adversary proceedings in the bankruptcy court, seeking to

recover certain transfers made to investors in the form of the return of amounts

they had invested i.e., the principal of their investments and, in some cases,

purported profits, as fraudulent transfers under the Bankruptcy Code and



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2/ The Trustee has since dismissed or settled with some of the defendants.

3/ For the purposes of this appeal, it is assumed that Wright used IMA and itsaffiliated hedge funds to operate a Ponzi scheme at all material times.(Trustees Br. 6.)

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comparable state fraudulent transfer statutes. 2/ Under the liquidation plan

confirmed by the bankruptcy court in August 2008, it appears that the main assets

that would be available for distribution to the defrauded IMA investors are the

assets the Trustee hopes to recover through the fraudulent transfer actions.

The Trustee moved for partial summary judgment, seeking a ruling that,

assuming he were able to establish aprima facie case for the recovery of the

payments as fraudulent transfers, the investors could not assert a defense under

Section 548(c) of the Bankruptcy Code, 11 U.S.C. 548(c), and comparable state

law fraudulent transfer statutes, that they received the payments for value and in

good faith.

The general rule with respect to investors in Ponzi schemes is that good

faith investors give value, and can assert the Section 548(c) affirmative defense

to a fraudulent transfer action, for transfers up to the amount they invested, but not

for transfers of additional funds. 3/ The Trustee does not address whether the

investors had the requisite good faith; at this stage of the proceedings, he is

seeking a ruling that, as a matter of law, the investors did not give value and



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acquisition and use of funds through a fraudulent scheme, not the particular

manner in which the perpetrator carried it out. (Order 12.)

The bankruptcy court certified its order for direct interlocutory appeal by

the Trustee to this Court.



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SUMMARY OF ARGUMENT

The bankruptcy courts denial of the Trustees motion should be affirmed.

The bankruptcy court correctly concluded that there is no basis, simply because

the scheme in this case involved purported equity interests, for a result contrary to

the general rule in Ponzi schemes that good faith investors can retain transfers up

to the principal amounts they invested. The substance of a Ponzi scheme is the

fraud perpetrated on investors; the form of the so-called investment should not

be controlling. Further, in light of the hardship that would be inflicted on

defrauded investors if they were now forced to disgorge funds received years ago

and likely already spent, the equitable balance should be struck in favor of

allowing innocent investors to keep their principal amounts.



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ARGUMENT

THE BANKRUPTCY COURT CORRECTLY DETERMINED THAT THEGENERAL RULE IN PONZI SCHEMES APPLIES WHETHER AN

INVESTMENT INVOLVES EQUITY OR DEBT.

Investors in Ponzi schemes who become defendants in fraudulent transfer

actions are, as a general rule, deemed to have given value, for purposes of the

defense to a fraudulent transfer action, for any payments they received prior to a

bankruptcy or receivership that represent a return of the initial amount they

invested. The Trustees view that there should be a different rule for equity

investments finds no support in the extensive case law addressing Ponzi schemes.

This view is also at odds with the Commissions policy of generally not seeking

recovery of investment principal received by innocent investors in Ponzi schemes.

The policy arguments advanced by the Trustee in support of his position did not

convince the bankruptcy court and should similarly fail to persuade this Court.

A. Investors with Equity Interests in an Entity Operated as a PonziScheme Give Value for Transfers Up to the Amount of Principal

Invested for Purposes of the Affirmative Defense to a FraudulentTransfer Action.

Under Section 548(a)(1)(A) of the Bankruptcy Code, a trustee may avoid

any transfer made within two years before the filing of a bankruptcy petition if the

debtor made the transfer with actual intent to hinder, delay, or defraud any entity



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4/ The time period was extended from one year to two years by the BankruptcyAbuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-8, 1402(1), 119 Stat. 23, but the extension was made applicable only to

bankruptcy cases that commenced more than one year after April 20, 2005.IMA filed for bankruptcy relief on March 16, 2006.

5/ The concept of value is material to both the Section 548(c) defense andthe Trustees claim for recovery of payments as constructively fraudulent

transfers. SeeMerrill v. Abbott (In re Indep. Clearing House Co.), 77 B.R.843, 861 (D. Utah 1987) (en banc) (in examining a defendants Section548(c) defense, the court explained that [t]he extent to which a defendant

gave value for a particular transfer is essentially the flip side of thequestion we have already discussed ... [] namely, whether the debtorreceived a reasonably equivalent value in exchange for the transfer).

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to which the debtor was ... indebted. 11 U.S.C. 548(a)(1)(A). 4/ The existence

of a Ponzi scheme is sufficient to establish that a transfer was made with the

requisite fraudulent intent. Barclay v. Mackenzie (In re AFI Holding, Inc.), 525

F.3d 700, 704 (9 Cir. 2008). Under Section 548(a)(1)(B) of the Bankruptcyth

Code, a trustee may avoid any transfer made within two years before the filing of a

bankruptcy petition if the debtor received less than a reasonably equivalent value

in exchange for such transfer or obligation; and ... was insolvent on the date that

such transfer was made[.] 11 U.S.C. 548(a)(1)(B)(i)-(ii)(I). 5/ Section

544(b) of the Code allows trustees to bring actions under state law, which

typically provides longer reach-back periods. 11 U.S.C. 544(b)(1). The Trustee

is seeking to avoid transfers to the investors under both the Bankruptcy Code and



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6/ A transfer or obligation is not voidable under [the Georgia Code provisioncomparable to 11 U.S.C. 548(a)(1)(a)] against a person who took in good

faith and for a reasonably equivalent value or against any subsequenttransferee or obligee. GA.CODE ANN. 18-2-78(a); Notwithstandingvoidability of a transfer or an obligation under this article, a good faith

transferee or obligee is entitled, to the extent of the value given the debtorfor the transfer or obligation, to: (1) A lien on or a right to retain any interestin the asset transferred [.] GA.CODE ANN. 18-2-78(d).

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the fraudulent transfer provisions of the Georgia Code, which have a four-year

statute of limitations. SeeGA.CODE ANN. 18-2-74(a), 18-2-75(a), 18-2-77(a),

18-2-79.

The Trustee asks this Court to rule that the investors cannot assert the good

faith-for value defense under the Bankruptcy Code and comparable state law

fraudulent transfer statutes because they did not provide value for the transfers

they received. Section 548(c) of the Code provides, in pertinent part, that a

transferee ... that takes for value and in good faith ... may retain any interest

transferred ... to the extent that such transferee ... gave value to the debtor in

exchange for such transfer or obligation. 11 U.S.C. 548(c). See also GA.CODE

ANN. 18-2-78. 6/

Value for the purposes of this defense to a fraudulent transfer action

includes the satisfaction ... of a present or antecedent debt of the debtor[.] 11



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which arose when they bought the modules, regardless of whether there existed a

contractual right to the return of principal. Id. at 595-96.

Even when courts find that a payment in a Ponzi scheme case was on

account of a contractual arrangement, they often make clear that a restitution claim

is also available to support the finding that the defendant in a fraudulent transfer

action gave value for the transfer. See Dicello v. Jenkins(In re Intl Loan

Network, Inc.), 160 B.R. 1, 12 (Bankr. D.D.C. 1993) ([f]rom the time a defendant

entrusted money to ILN, ILN was indebted to that defendant for the amount of his

investment[;] [t]his debt arose either as the result of a contractual obligation or the

defendants right to restitution) (emphasis added, footnote omitted);Indep.

Clearing House, 77 B.R. at 857 ([w]e believe that the Codes definition of debt

and its related terms is broad enough to cover the debtors obligation to return a

defendants principal undertaking, whether that obligation was based on the

contract between the debtors and the defendant or was based on the defendants

right to restitution) (emphasis added). Significantly, theIndependent Clearing

House court went on to emphasize that the defendants contract claims were not

critical to its decision:

If there was not a valid contract between the debtors and a defendant,before the transfer the defendant would have had a claim forrestitution, to prevent the debtors unjust enrichment. If there was a



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valid contract that gave the defendant an equity interest in thedebtors business, as the trustee contends, the defendant would stillhave had a right to restitution if the debtors fraud induced him toenter into the contract.

Id. at 857 n.24 (citation omitted).

Finally, the Trustees argument against what he refers to as transmutation

without articulation his shorthand for the bankruptcy courts deeming the

payment on account of an equity interest to be payment in satisfaction of a fraud

claim that was neither asserted nor proven is undermined by the numerous cases

that, as the Trustee acknowledges, fully recognize the claims for restitution and

rescission of defrauded investors, regardless of the fact that the defrauded

investors had neither asserted nor proven their fraud claims at the time of the

subject transfers. (Trustees Br. 46-47.)

In support of his argument, the Trustee contends that it is well-established

that any claimant must both provide notice of a claim and articulate the basis for

the claim. (Trustees Br. 47.) But, if receiving the payment were conditioned on

asserting the fraud claim, the investor would necessarily be aware of the

fraudulent nature of the investment and thus would be unable to establish the

good faith required for the affirmative defense. There is no reason for this Court

to reject the longstanding analysis that allows an innocent investor in a Ponzi



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scheme who receives a payment that returns principal before the scheme collapses

to assert the defense that the payment was received in good faith and for value.

Moreover, the Trustees concerns about principles of notice and due process

are present regardless of whether the unasserted claim is for equity or debt.

Applying the general rule means that any innocent investor, whether the

investment is debt or equity, who gets his principal back before the bankruptcy or

receivership is favored over an investor who does not. The Trustees response,

that the transmutation from equity to debt is somehow more problematic than

the transmutation from debt to another form of debt, is both inconsistent with

the case law that recognizes that defrauded equity investors have fraud-based debt

claims at the time of the subject transfers and not relevant in the Ponzi scheme

context, as discussed infra, pp. 22-24.

B. Policy Reasons Support the View that There Should Be NoDistinction Between Debt and Equity in the Context of anAction To Recover Principal Payments in a Ponzi Scheme Case.

There is no compelling reason why innocent investors who have what are

purported to be debt interests in a Ponzi scheme should be allowed to keep

principal amounts while innocent investors who have what are purported to be

equity interests should not. Commission enforcement actions against perpetrators

of Ponzi schemes involve a variety of investments, including notes (e.g.,Donell,



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supra) and equity interests (e.g., AFI Holding,supra;Bayou Group, LLC,supra).

Investors suffer the same harm regardless of the form the purported investment

takes and the availability of the good faith-for value defense to a fraudulent

transfer action should not depend on the happenstance of how the fraudster

chooses to pitch the investment.

Consistent with the general rule, innocent investors who redeem their

investments before a Ponzi scheme collapses generally should not be liable for the

return of principal amounts. This result reflects a balancing of interests. On the

one hand, in an appropriate case, a bankruptcy trustee or a receiver in a

Commission action can bring an action to recover fictitiousprofits. This is so

even though it may create a significant hardship when an innocent investor ... is

informed that he must disgorge profits he earned innocently[.] Donell, 533 F.3d

at 776. In contrast, in most cases, the disruption to an innocent investor who has

only gotten back the money he or she invested goes too far. SeeIn re Indep.

Clearing House, 77 B.R. at 887 ([t]he ideal solution, of course, would be for all

undertakers to get back their original undertaking. But that solution presupposes

that the original undertakings are still around to be gotten back, and it is clear that

they are not).



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11/ In asserting such equitable disgorgement claims, the Commission may incertain circumstances seek to recover payments of principal, especiallywhen the payments are made to insiders or other favored investors.

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Similar considerations arise when the Commission asserts equitable

disgorgement claims in its enforcement actions against relief defendants who have

not themselves committed violations of the federal securities laws. The

Commissions policy is that innocent investors who recover their initial

investments before a Ponzi scheme collapses generally should not be liable for the

return of principal. 11/

While there is arguably some merit to the Trustees view that fairness to all

investors favors the recovery of money received by earlier investors so that it can

be distributedpro rata, this consideration is outweighed by the hardship that

would be inflicted on individual investors forced to return principal payments

received in good faith. These are not payments for fictitious profits that, in a

Ponzi scheme with no legitimate earnings, necessarily come from the money other

investors contributed to the investment pool. Rather, principal amounts represent

a return of the investors own contributions to the investment pool. The

application of the principle that such investors are entitled to keep the amounts

they invested should not turn on an illusory distinction between an investment in a

Ponzi scheme structured as debt and a similar investment structured as equity.



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C. The Trustees Arguments about the Differences Between Debtand Equity Are Not Persuasive in the Ponzi Scheme Context.

The policy reasons that generally underlie the priority of debt over equity in

bankruptcy do not apply in the context of a fraudulent transfer action involving a

Ponzi scheme. In a real business enterprise, creditors rely on the distinction

between debt and equity. See Am. Broad. Sys., Inc. v. Nugent (In re Betacom of

Phoenix, Inc.), 240 F.3d 823, 829 (9 Cir. 2001) (Shareholders expect to taketh

more risk than creditors in return for the right to participate in firm profits. The

creditor only expects repayment of a fixed debt. It is unfair to shift all of the risk

to the creditor class since the creditors extend credit in reliance on the cushion of

investment provided by the shareholders.). In the bankruptcy of an entity

operated as a Ponzi scheme, however, the most significant claims are generally

those of the defrauded investors, as opposed to those of ordinary trade creditors.

Thus, while fraudulent transfer actions against equity holders in the context

of a typical bankruptcy involving a legitimate enterprise would likely serve to

redistribute assets from equity holders to creditors, in a Ponzi scheme, reallocation

is primarily among investors of the same class. As the bankruptcy court observed,

in a Ponzi scheme the fraudulent transfer laws, for the most part, result in an

alteration of the distribution of assets among the defrauded victims. (Order 11.)



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Reliance on the principle that creditors have priority over equity holders does not

make sense in this situation.

The Trustees arguments about the distinctions between debt and equity are

also inapposite in the Ponzi scheme context because of the nature of the value

deemed to be given by investors to the debtor for purposes of the defense to a

fraudulent transfer action. Because courts interpret this value to be the

satisfaction of a claim for restitution or rescission, as opposed to the debt or equity

interest itself,see discussion,supra, pp. 9-19, the nature of the underlying

instrument is not relevant.

The Trustee relies heavily on the Terry Manufacturingcase to support his

arguments about the differences in treatment accorded to debt as compared to

equity. Alexander v. Albright (In re Terry Mfg. Co., Inc.), Nos. 03-32063, 05-

3050, 2007 WL 274319, at *1 (Bankr. M.D. Ala. Jan. 25, 2007). Terry did not

involve a Ponzi scheme. Instead, the case involved shareholders of a bankrupt

company formerly run by two dishonest businessmen. Terry, 2007 WL 274319,

at *2. In response to the trustees attempt to recover certain dividends as

fraudulent conveyances under 11 U.S.C. 548 and Alabama state law, id. at *1,

the shareholders claimed that they had been defrauded by the company and its

principals and that the dividends they had received satisfied, in part, the restitution



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obligations owed to them. Id. at *5. The court dismissed the restitution argument,

citing, among other reasons, the lack of precedent for the recharacterization of

dividends as payments in satisfaction of a debt. Id. at *7. The court cautioned

that, [i]f that were the case, in almost every corporate bankruptcy involving fraud,

shareholders could advance their status and recharacterize their equity interests as

unsecured claims sharing equally in the assets with the holders of unsecured

claims. Id. This argument highlights why Terry is inapposite to the Ponzi

scheme at issue. The IMA dispute primarily involves the distribution of assets

among defrauded investors, not between creditors and equity holders.

Finally, the Trustees arguments about equitable distribution are out of place

in the context of a fraudulent transfer action. Unlike preference actions, which are

intended to promote equality of distribution, fraudulent transfer actions are

intended to ensure that the estate is not diminished. See United Energy, 944 F.2d

at 597 (the policy behind section 548 is to preserve the assets of the estate).



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CONCLUSION

For the foregoing reasons, the bankruptcy court correctly determined that

the investors gave value for purposes of the fraudulent transfer laws to the

extent that they received payments up to the amount of principal invested, and the

order of the bankruptcy court should therefore be affirmed.

Respectfully submitted,

DAVID M. BECKERGeneral Counsel

MARK D. CAHNDeputy General Counsel

JACOB H. STILLMANSolicitor

KATHARINE B. GRESHAM

Assistant General Counsel

/s/ Morgan Bradylyons

MORGAN BRADYLYONSAttorney

Securities and Exchange Commission100 F. Street, NEWashington, DC 20549(202) 551-7926 (Bradylyons)

July 8, 2010

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CERTIFICATE OF COMPLIANCE

I hereby certify that this brief complies with the type-volume limitations of

Fed. R. App. P. 29(d) because this brief contains 5340 words, excluding the

Certificate of Interested Persons and Corporate Disclosure Statement, Table of

Contents, Table of Citations, Certificate of Compliance, and Certificate of Service.

I also certify that this brief complies with the typeface requirements of Fed.

R. App. P. 32(a)(5) and the type style requirements of Fed. R. App. P. 32(a)(6)

because this brief has been prepared in a proportionally spaced typeface using

WordPerfect 11 in 14 point Times New Roman type.

/s/ Morgan Bradylyons MORGAN BRADYLYONSSecurities and Exchange Commission

July 8, 2010



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CERTIFICATE OF SERVICE

I hereby certify that on July 8, 2010, I caused seven paper copies and one

electronic copy of the Brief of the Securities and Exchange Commission, Amicus

Curiae, to be served via UPS overnight delivery on the Clerk of the Court of

Appeals for the Eleventh Circuit. I certify further that on that same date I caused

one paper copy of the brief to be served via UPS overnight delivery on the

following parties:

John W. Mills, Esq.Colin Bernardino, Esq.Kilpatrick Stockton1100 Peachtree St.Suite 2800

Atlanta, GA 30309

Mark S. Kaufman, Esq.Brian E. Bates, Esq.McKenna Long & Aldridge LLP303 Peachtree St. NE, Suite 5300Atlanta, GA 30308

Paul M Spizzirri, Esq.Spizzirri Law Offices1170 Peachtree St., Suite 1200Atlanta, GA 30309

Sharon M. Lewonski, Esq.Epstein, Becker & Green, P.C.945 East Paces Ferry Rd., Suite 2700Atlanta, Georgia 30326

Jonathan H Fain, Esq.Jonathan H. Fain and Assoc., PC66 Lenox PointeAtlanta, GA 30324

Robert J. Mottern, Esq.Investment Law Group of Gillett,Mottern & Walker1230 Peachtree St., Suite 2445

Atlanta, GA 30309



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Thomas M. Byrne, Esq.Angela R. Fox, Esq.Sutherland Asbill & Brennan LLP999 Peachtree St., NE

Atlanta, Georgia 30309-3996

Sblend A. Sblendorio, Esq.Catosha L. Woods, Esq.Hoge Fenton Jones & Appel, Inc.4309 Hacienda Dr., Suite 350

Pleasanton, CA 94588

Gregory T. Bailey, Esq.571 Culberson StreetAtlanta, GA 30310

Christopher D. Phillips, Esq.Lamberth, Cifelli, Stokes, Ellis &

Nason, P.A.

3343 Peachtree Rd. NE, Suite 550Atlanta, GA 30326

Kevin A. Stine, Esq.

Joshua Tropper, Esq.Baker, Donelson, Bearman,Caldwell & Berkowitz, P.C.1600 Monarch Plaza3414 Peachtree Rd. NEAtlanta, GA 30326

Timothy Mungovan

Jonathan SabloneLee HarringtonJoshua Barlow

Nixon Peabody LLP100 Summer St.Boston, MA 02110

Heather D. Brown, Esq.Mark A. Kelley, Esq.

Kitchens, Kelley, Gaynes, P.C.Eleven Piedmont Center - Suite 900

3495 Piedmont Road NEAtlanta, GA 30305

William R. Lester, Esq.Fryer, Shuster & Lester, P.C.

1050 Crown Pointe Pkwy., Suite 410Atlanta, GA 30338

James K. Knight, Jr., Esq.401 Atlanta St.

Marietta, GA 30060

/s/ Morgan Bradylyons

MORGAN BRADYLYONS


perkins v. haines - s.e.c.'s amicus brief

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