Ninth Circuit Allows Recovery Of Investor Referral Fees Paid In $120 Million Ponzi Scheme

A federal appeals court has ordered that a receiver can recover referral fees paid to a Ponzi scheme investor who referred friends and family to the scheme because those referral services did not provide value to the scheme.  The U.S. Court of Appeals for the Ninth Circuit issued a decision in Hoffman v. Markowitz affirming the district court's previous award of partial summary judgment in favor of the court-appointed receiver over Nationwide Automated Systems, Inc. (NASI).  While the Ninth Circuit declined to find that the referral fees are "per se voidable" and issued an unpublished opinion, the decision may provide a template for receivers to pursue similar fees in ongoing and future actions.

The Scheme

NASI raised more than $120 million from roughly 2,000 investors with the promise of guaranteed returns of 20% for each automated teller machine (ATM) an investor purportedly purchased and leased back to the company.  Each investor signed a contract memorializing their investment which included the serial number and location of each ATM but also prohibited the investor from "interfering" with the ATM's operation by contacting any location where the ATM was installed or any ATM service provider. 

A bank account analysis showed that NASI raised more than $120 million from January 2013 to August 2014 alone.  After NASI began bouncing checks to investors in August 2014, the Securities and Exchange Commission brought an emergency enforcement action and obtained the appointment of William Hoffman as Receiver.  Gillis and Wishner were later arrested and sentenced to prison terms of ten and nine years, respectively.

The Markowitz Clawback Suit

In addition to the promised sizeable returns, NASI also paid a referral fee of $500 to $1,000 to each investor or non-investor who referred investors to the scheme.  The district court granted the receiver's request to pursue clawback claims against various third parties including those who received referral fees.  The receiver filed suit against Howard Markowitz and alleged that Markowitz received nearly $750,000 in referral fees from NASI.  The district court entered partial summary judgment in the receiver's favor in August 2017 and allowed the recovery of all referral fees paid to Markowitz, and that decision was appealed.  

On appeal, the Ninth Circuit noted that the California Uniform Voidable Transactions Act (CUVTA) made payments from a Ponzi scheme to a third party voidable when made with either actual or constructive intent unless the transferee could show that they received the transfer in good faith and that they provided reasonably equivalent value for the transfer.  Here, the receiver alleged that the referral fees were voidable under CUVTA because Moskowitz's referral services provided no value to NASI investors and instead only served to further deepen the scheme's insolvency through the increase in underlying liabilities. Other courts around the country have split on this issue, but the receiver urged the Ninth Circuit to follow the decision reached by the U.S. Court of Appeals for the Fifth Circuit in Warfield v. Byron, 436 F.3d 551 (5th Cir. 2006) which held that referral services for a Ponzi scheme did not provide any value to the scheme.  

The Ninth Circuit declined to adopt a brightline rule holding that referrals to a Ponzi scheme are "per se voidable because they never provide value," but did observe that Markowitz conceded that the only service he provided in return for the referral fees was the referral of new investors to the scheme. Based on these facts and the reasoning in Warfield, the Court sided with the receiver and affirmed the district court's finding that Markowitz was required to disgorge nearly $750,000 in referral fees to the receiver.  While the decision was not published and cannot serve as binding precedent, it is yet another tool available to receivers seeking to maximize recovery for defrauded victims. 

A copy of the Ninth Circuit's opinion is below:

17-56290 - hoffman v markowitz by on Scribd