Receiver in Trevor Cook Ponzi Scheme Wins Approval to Hire Outside Counsel in Quest for More Assets

The court-appointed receiver tasked with recovering assets for the benefit of victims defrauded by Trevor Cook's $194 million Ponzi scheme has received approval to hire high-powered outside counsel to pursue claims against third-party entities who may have aided and abetted Cook's scheme.  The receiver, R.J. Zayed, was authorized by United States District Judge Michael Davis to retain firms in Texas, New York, and Atlanta who specialize in pursuing complex litigation against entities such as law firms, financial institutions, and accounting firms.  The cost to the receiver: nothing.

Zayed proposes to hire outside counsel on a contingency basis, which is a payment structure in which the hired firm is responsible for the fees and costs associated with pursuing a particular case in return for a specified percentage of any future recovery.  In complex cases, this often entails hundreds of thousands of dollars in foregone legal fees and costs with the expected hope that a recovery or settlement will result.  In his motion to hire outside counsel, Zayed emphasizes this fact, stating that "as a result of this contingent fee structure, the Receiver would gain the expertise of counsel who specialize in the claims at issue while conserving liquid assets of the Receivership."  

Appearing in court with Zayed was William T. Reid IV, whose firm, Reid Collins & Tsai LLP, is one of the firms retained by Zayed.  Reid is a former Assistant United States Attorney who has substantial experience in past and current litigation involving similarly-sized Ponzi schemes.  Also receiving approval were two Atlanta law firms: Doffermyre, Shields, Canfield & Knowles, and Smiley, Bishop & Porter.  Each firm's arrangement with Zayed gives it 17.5% of any pretrial settlement, or 27%-30% if the case proceeds to trial.  

While Zayed declined to specify exactly what third-party entities he intends to pursue, a September 2011 Status Report (the "Report") filing indicated that entities currently under scrutiny include JDFX Technologies, which specialized in trading platforms for the foreign exchange industry; JP Fund Services, a Swiss trading firm; Capricorn, a Swiss asset-management firm; the bankrupt Crown Forex SA, a Swiss foreign currency trader; its former executives, Shadi Swais and Ibrahim Hasanein of Jordan; Gary Saunders, a lawyer in Corona, Calif., and his business associate Holger Bauchinger, a German citizen working as a developer in Panama City, Panama. Additionally, the Report stated that Zayed was investigating claims against third parties including financial institutions and brokerage firms, including Associated Bank of Green Bay, Wis., and Peregrine Financial Group, a major non-clearing U.S. futures commission merchant.  

One of the advantages to hiring outside counsel in the context of a receivership to pursue these claims on a contingency basis is the difficult legal standard required in such third-party claims.  Common causes of action asserted in Ponzi scheme litigation against financial institutions include aiding and abetting fraud and aiding and abetting breach of fiduciary duty.  Each of these causes of action requires either factual allegations giving rise to a strong inference that the entity has actual knowledge of the scheme, or that the entity provided substantial assistance to the scheme.  

Additionally, causes of action asserting fraud or mistake are subject to heightened pleading requirements under Rule 9(b) of the Federal Rules of Civil Procedure, and require that the charging party must plead the allegations giving rise to the claim with particularity.  In other words, vague allegations that an entity should have known of the fraud generally do not suffice.  A recently-issued decision out of a New York federal court illustrates this difficulty:

Statements alleging that that a defendant “should have known that something was amiss with transactions,” even if pled with conclusory statements that the defendant “actually knew something notwithstanding . . . [are] insufficient to support an aiding-and-abetting claim under New York law.  Thus, “as in the context of pleading a primary violation, pleading knowledge for purposes of an aiding and abetting claim requires allegations of facts that give rise to a ‘strong inference’ of actual knowledge.” 

Thus, while certainly not insurmountable, claims based on these causes of action can often entail detailed motion practice and extensive discovery, each of which would strain receivership resources.  Additionally, the experience of the outside firms along with their ability to devote substantial resources to the litigation make Zayed's move a smart one, both for the receivership and for the victims.

A copy of the Receiver's Motion to Retain Outside Counsel is here.