Dividing up a shortfall from a Ponzi scheme was first posed before the United States Supreme Court in 1924. The infamous case of Cunningham v. Brown dealt with the original Ponzi scheme of Charles Ponzi and distributing remaining funds back to victims when his investment scheme was finally unravelled, but left victims with only a fraction of their original investments. Unraveling a Ponzi scheme to return a shortfall of money back among its victims is akin to untangling the noodles in a half-eaten bowl of spaghetti at a buffet and trying to determine who cooked each strand. Where multiple chefs (all using the same recipe) all had their spaghetti thrown in one giant pot, it would be a seemingly impossible task to untangle the half-eaten bowl to see which chefs’ spaghetti was still in that bowl.
In Boughner v. Greyhawk Equity Partners Limited Partnership (Millenium) John Pirie and Dave Gadsden (who acted to recover funds in parallel civil and receivership proceedings for the fund’s largest investment group) address the current Canadian law regarding the allocation and distribution of remaining funds in a Ponzi investment fraud to investors. The Greyhawk case provides considerable insight into the challenges that investors face over the remaining pool of money once a Ponzi scheme is unravelled, but also illustrates the challenges courts continue to face in making such determinations. The issue in the case was whether to distribute pro rata on the basis of original contributions to the fund (the pro rata method), or pro rata on the basis of actual fund performance during the period that each investor was actually invested in the fund. The later method is known as the lowest intermediate balance rule.
Status Update: On January 18, 2013, Ontario’s Court of Appeal decided in this important case held that Ontario courts should attempt to apply the lowest intermediate balance rule when dealing with competing claims to comingled funds. A pro rata allocation is only available when the calculations for the lowest intermediate balance rule are unworkable.