Securities and Exchange Commission v. Wealth Management, LLC, et al., 628 F.3d 323 (7th Cir. 2011)
CASE SNAPSHOT
This is the fifty-second in a series of installments on this blog that are discussing issues arising in the aftermath of the global Ponzi scheme perpetrated by Bernard L. Madoff (“Madoff”).
A bank did not engage in “egregious conduct” sufficient to subordinate its lien on equitable grounds, held the U.S. District Court for the Northern District of Illinois on Dec. 10, 2014. In re Sentinel Management Group, Inc., 2014 WL 6990322 (N.D. Ill. Dec. 10, 2014) (“Sentinel IV”). Moreover, because of the bank’s “good faith,” the corrupt borrower’s fraudulent pledging of customer funds to the bank to secure a so-called $312-million rescue loan “cannot be avoided.” Id. at *10.
Background: Grupo OAS, a Brazilian construction conglomerate linked to a massive corruption scandal (“OAS”), filed for Chapter 15 creditor protection in the Bankruptcy Court for the Southern District of New York on April 15, 2015, two weeks after entering bankruptcy in Brazil. If “recognized” by Bankruptcy Judge Stuart Bernstein, the Chapter 15 petition would, among other things, essentially bind OAS creditors in the United States to the restructuring terms approved by the Brazilian court overseeing OAS’s reorganization.
The recent Fifth Circuit decision in Janvey v. The Golf Channel, Inc. ("Golf Channel") reminds us again that sometimes, despite our best efforts, bad things happen to good people. In that case, the Golf Channel learned a painful lesson arising out of its innocent involvement with Stanford International Bank, Ltd.
When a debtor pays the market cost for goods and services provided to it by third-party vendors, these payments normally cannot be recovered as fraudulent transfers in the U.S. That is because the debtor receives reasonably equivalent value for the payments to its vendors and because the unsuspecting vendors can assert a good faith defense based on the value provided.
The former CEO of U.S. broker-dealer Direct Access Partners (DAP), Benito Chinea, and a former DAP managing director, Joseph Demeneses, each pleaded guilty one count of conspiracy to violate the FCPA and the Travel Act in connection with a scheme to bribe an official at a Venezuelan development bank, Banco de Desarollo Económico y Social de Venezuela (BANDES), in exchange for the official’s directing BANDES’ trading business to DAP.
Suppliers of good and services (“trade creditors”) generally have no duty to determine whether their customers are operating an illegal enterprise. However a recent Fifth Circuit opinion presents an unprecedented “claw-back” risk facing trade creditors who unknowingly provide goods and services to a “Ponzi-scheme” enterprise.
The Janvey Opinion
This case is the product of yet another dispute in the extensive, multi-billion dollar fraud perpetrated by Tom Petters. In 2005, as the sole board member of Petters Group Worldwide, LLC (“PGW”), Petters directed the acquisition of Polaroid, which operated independently and legitimately as a going concern. In late 2007 and early 2008, Polaroid and other Petters companies began experiencing financial difficulties. In January 2008, PGW approached Ritchie about a loan and the next day, Ritchie loaned $31 million to PGW to pay debts of Polaroid and PGW.