U.S. Commodity Futures Trading Comm'n v. One

• Decision Date: 11 March 2011
• Docket Number: Civil Action Nos. H–09–1540,H–09–1541.
• Citation: 778 F.Supp.2d 775
• Parties: U.S. COMMODITY FUTURES TRADING COMMISSION, Plaintiff,v.PRIVATEFX GLOBAL ONE, et al., Defendant.Securities and Exchange Commission, Plaintiff,v.PrivateFX Global One, et al., Defendant.
• Court: U.S. District Court — Southern District of Texas

778 F.Supp.2d 775

U.S. COMMODITY FUTURES TRADING COMMISSION, Plaintiff,

v.PRIVATEFX GLOBAL ONE, et al., Defendant.Securities and Exchange Commission, Plaintiff,

v.PrivateFX Global One, et al., Defendant.

Civil Action Nos. H–09–1540

H–09–1541.

United States District Court, S.D. Texas, Houston Division.

March 11, 2011.

Charles D. Marvine, Christopher A. Reed, U.S. Commodity Futures Trading Commission, Kansas City, MO, Timothy Sean McCole, Securities and Exchange Commission Fort Worth Regional Office, Forth Worth, TX, for Plaintiff.Thomas L. Taylor, III, The Taylor Law Offices, P.C., J. Michael Bell, Thompson & Knight LLP, Anthony Laurent Laporte, Hanszen Laporte, Houston, TX, for Defendant.Robert D. Watson, The Woodlands, TX, pro se.Daniel J. Petroski, Houston, TX, pro se.

Order

GRAY H. MILLER, District Judge.

Pending before the court is a motion to approve a plan of distribution (Dkt. 133), which was filed by the court-appointed receiver, Thomas L. Taylor, III (“Receiver”). Certain investors in an offering by PrivateFX Global One (“Global One Investors”) have filed an objection to the proposed plan. Dkt. 138. Wells Fargo Bank, N.A., which is a creditor of defendant Daniel J. Petroski, also filed an objection. Dkt. 139. Additionally, the Global One Investors have filed a motion to intervene. Dkt. 138. Having considered the motion to approve the plan of distribution, the content of the proposed plan, which is contained within the motion, the objections, and the applicable law, the court is of the opinion that the motion to approve the plan (Dkt. 133) should be GRANTED, the objections (Dkts. 138, 139) OVERRULED, and the plan APPROVED. Additionally, the Global One Investors' motion to intervene (Dkt. 138) should be DENIED.

I. Background

The Securities and Exchange Commission (“SEC”) and the Commodity Futures Trading Commission (“CFTC”) each filed a complaint against defendants which alleged violations of certain securities and commodities laws. Dkt. 55. The court consolidated the SEC and CFTC cases. Dkt. 11. The court found good cause to believe that defendants Global One, 36 Holdings Ltd., Robert D. Watson, and Daniel J. Petroski engaged in acts and practices constituting violations of Commodity Exchange Act and the Securities Exchange Act. Dkts. 10, 12, 13. The court therefore froze the assets owned, controlled, managed, or held by or for the benefit of these defendants and appointed the Receiver. Id. The court eventually entered consent orders of preliminary injunctions as to these same defendants. Dkts. 28–31.

The defendants and the CFTC reached an agreement and consented to the entry of a permanent injunction.¹ Dkt. 92. The defendants did not admit or deny the facts outlined in the consent order, but they did agree that all of the facts “shall be taken as true and correct and be given preclusive effect, relating to any claim made by CFTC.” Id. The consent order indicates that the defendants “began raising funds from U.S. investors through an unregistered offering of up to $45 million in Global One shares.” Id. The defendants informed investors that Global One would “ ‘speculate in foreign currency inter-bank markets based upon a proprietary intra-day and weekly dealing model.’ ” Id. (quoting a memorandum issued by defendants). The defendants claimed that Global One had “never had an unprofitable month of forex trading.” Id. The defendants further advised that Global One would employ the services of 36 Holdings. Id. “The Global One offering raised approximately $21 million from at least 80 investors.” Id. Global One sent statements to its investors indicating that “substantially all of Global One's income came from purported forex trading.” Id. The statements demonstrated a consistent profit, despite the volatile nature of forex trading. See id. The statements were actually “false financial statements of Global One and 36 Holdings, based on information prepared by [defendant] Watson, that misrepresented forex trading activity and profits supposedly earned therefrom.” Id.

The Receiver determined that there are approximately 135 defrauded investors in these schemes, and the defrauded investors have asserted claims exceeding $85 million. Dkt. 133. According to the Receiver, defendant 36 Holdings was “the fulcrum in a number of continuing forex trading schemes” and that “Global One ... was the latest vehicle employed in the ongoing fraud and its investors were the most recently defrauded by Defendants' trading schemes which have victimized numerous other investors.” Id.

The Receiver has recovered approximately $15 million from the receivership estate, which consists of assets of the defendants and related entities (“Receivership Estate”). Dkts. 15, 51, 133. The Receiver requests that the court authorize an interim distribution of $12 million, which he proposes should be distributed to each investor on a pro rata basis, “based upon their net out-of-pocket loss as a percentage of the total out-of-pocket losses of all of the Investors.” Dkt. 133 at 12. The Receiver proposes to retain approximately $1,630,000 “to use to protect the Receivership Estate's interests in assets and conclude the efforts of the Receiver,” including taxes, administration of the wind down of the Receivership Estate, and conclusion of litigation and asset sales that will benefit the Estate. Id. The Receiver proposes to make an additional distribution at the conclusion of the Receivership. Id. at 12–13.

II. Global One's Objections to the Plan

The Global One Investors are opposed to the Receiver's plan of distribution. They hired a forensic accountant who declares that at least $10.6 million of the funds in the Receivership Estate were contributed by the Global One Investors, were originally placed in separate and distinct bank accounts, have always remained under the separate control of Global One in those accounts, and remained separate until the Receiver took possession of all of the defendants' assets. Dkt. 138 at 2. The Global One Investors assert that these assets should be returned to them rather than distributed under the Receiver's plan, as the other investors who would benefit from the funds if distributed on a pro rata basis did not invest in a distinct investment program and cannot trace the assets they contributed. Id. The Global One Investors advocate for the adoption of a plan prepared by their forensic accountant, which allows for a pro rata distribution to the Global One Investors of the funds that the forensic accountant determined had remained segregated in the Global One accounts and a pro rata distribution of the remaining funds at the discretion of the Receiver. Id. & Dkt. 138, Exh. A.

The Receiver argues that a pro rata distribution is appropriate in this case because providing later investors in a Ponzi-type scheme “the opportunity to recover a larger portion of the funds would elevate positions of investors based merely on the ‘actions of the defrauders.’ ” Dkt. 143 at 12 (quoting United States v. Durham, 86 F.3d 70, 72 (5th Cir.1996)). The Receiver claims that pro rata distribution “ensures equity and is the only fair way to treat all the investors harmed by the Defendants' fraud.” Id. at 8.

A. The Original Ponzi Scheme

In 1924, the Supreme Court issued an opinion in an appeal of six suits brought by the trustee of the bankruptcy of the original Ponzi schemer-Charles Ponzi. Cunningham v. Brown, 265 U.S. 1, 44 S.Ct. 424, 68 L.Ed. 873 (1924). Charles Ponzi began his “remarkable criminal financial career” with capital of $150.00. Id. at 7, 44 S.Ct. 424. Ponzi “spread the false tale that on his own account he was engaged in buying international postal coupons in foreign countries and selling them in other countries at 100 per cent. [sic.] profit, and that this was made possible by the excessive differences in the rates of exchange following the war.” Id. He promised investors $150 for every $100 they loaned him, and he promised to pay within 90 days. Id. Then, he paid the original investments back within 45 days rather than the 90 promised, thus inducing the investors to loan more. Id. at 8, 44 S.Ct. 424. He had received $9,582,000 within 8 months, and he had issued notes for $14,374,000. Id. He actually made no investments whatsoever, so “all the money he had at any time was solely the result of loans by his dupes.” Id.

The six cases on appeal involved investors who were able to withdraw their investments, which had been deposited at the Hanover Trust Company, after the Ponzi scheme was revealed to the public but four months before Ponzi filed for bankruptcy. Id. The lower courts determined that the investors, by withdrawing the original funds they invested rather than the amount of the promissory notes, had rescinded their loan contracts for fraud, and that the investors who had failed to do so were merely creditors of the bankruptcy estate. Id. at 9, 44 S.Ct. 424. The Supreme Court disagreed, noting that Ponzi had “adopted the practice of permitting any who did not wish to leave his money for 45 days to receive it back in full without interest,” and the six defendants were merely taking advantage of this agreement. Id. at 10, 44 S.Ct. 424. The Supreme Court held that the six defrauded lenders were merely creditors of the estate, noting that after the date on which the news media declared Ponzi insolvent, “the victims of Ponzi were not to be divided into two classes, those who rescinded for fraud and those who were relying on his contract to pay them. They were all one class, actuated by the same purpose to save themselves from the effect of Ponzi's insolvency .... [T]hey were, in their inability to identify their payments, creditors and nothing more. It is a case the circumstances of which call strongly for the principle that equality is equity ....” Id. at 12–13, 44 S.Ct. 424.

B. Legal Standard

Ponzi's scheme was unfortunately only the beginning of many different variations of the same type of fraud....