Document Type
Research Memorandum
Publication Date
2025
Abstract
(Excerpt)
A business entity that meets the objective elements of a Ponzi scheme gives rise to the presumption that a debtor possesses the requisite mens rea—the "actual intent to defraud" creditors—in fraudulent conveyance actions. Section 548 of title 11 of the United States Code (the "Bankruptcy Code") "authorizes a trustee to avoid any transfer of funds made by a debtor with (a) an 'actual intent to hinder, delay, or defraud' creditors; or (b) for less than a 'reasonably equivalent value,' among other criteria." Fraudulent conveyance actions are "often called 'clawback' actions." These actions "seek to recover the false returns received by winning investors so that the excess proceeds can be distributed to losing investors." Court-appointed trustees oftentimes "rely on the fraudulent transfer provisions of the Bankruptcy Code or state fraudulent transfer laws to recover funds lost by Ponzi scheme investors." In a fraudulent conveyance action, a trustee "may pursue two distinct theories of recovery: constructive fraud or actual fraud." Under the theory of actual fraud, a trustee "must show that the debtor (Ponzi scheme operator) transferred funds to the transferee (the winning investor) ‘with actual intent to hinder, delay, or defraud’ the creditors (the losing investors)." If a trustee can successfully prove that a debtor operated a Ponzi scheme under section 548, then "[t]he mere existence of a Ponzi scheme" will suffice to establish the debtor’s "actual intent to defraud." Once the trustee meets their burden of proof by establishing a debtor’s actual intent to defraud, "the burden shifts to the winning investor to show they received the subject transfers in 'good faith' and for 'reasonably equivalent value.'"
This article analyzes the various aspects of the operation of a Ponzi scheme that give rise to the presumption of a debtor’s "actual intent to defraud." Part I of this article defines the key features of a Ponzi scheme that are sufficient to establish the basis of a fraudulent conveyance action. Part II discusses the mens rea of the "actual intent to defraud" and why it is difficult to establish. Part III, Section A of this article explains what the "Ponzi scheme presumption" is and how it gives rise to the streamlined establishment of a debtor’s "actual intent to defraud." Section B discusses why court’s jury instructions may omit the express mens rea term of "actual intent to defraud" and instead, may instruct jurors to infer a debtor’s intent from the establishment of the Ponzi scheme itself.