When a Ponzi scheme collapses, as with musical chairs, there will be some investors with a place to sit, while others are bereft of such comfort. Unlike musical chairs, the first time the music stops for most Ponzi schemes, the majority of the participants are on the losing end.  A recent British Columbia decision in the Bankruptcy of Rashida Abdulrasul Samji explored what happens when some of the fortunate few “winners” in an alleged Ponzi scheme negotiate a resolution with a bankruptcy trustee responsible for making decisions in the best interests of all the creditors of the bankrupt entity at the centre of the alleged scheme. 

John and Diana Tang were investors in an alleged Ponzi scheme that was allegedly operated for approximately a decade by the now-bankrupt Samji Group. As a result of the alleged scheme, some investors suffered a net loss, while others received more than they initially invested. The Tangs were in the group of “net winners”, but agreed to return their profits to the trustee-in-bankruptcy, in exchange for a release from any and all claims that the bankrupt or its creditors might have against them.  In other words, the Tangs, two of the net winners, would be permitted to keep all of their initial capital, but none of their gains.

The trustee submitted the agreement for the court’s approval, but the request was opposed by four of the “net losers”, who took the position that they would be materially prejudiced by the granting of the order because it would preclude their ability to bring an action against the “net winners” alleging a fraudulent preference and seeking to trace the funds.  They also argue that approving the settlement would establish a precedent for other net winners only having to disgorge their profits.  The concern raised was that such a settlement would result in an unfair sharing of the total losses from the alleged scheme amongst the entire group of investors. 

The trustee maintained that approval of the settlement is in the best interests of all of the creditors, and that any potential prejudice to individual creditors was outweighed by the benefits to the group as a whole.  The trustee submitted that approval of the settlement proposal would avoid potentially lengthy and expensive litigation, which would both expose the bankrupt estate to risk, and may ultimately lead to the recovery of less money for the creditors.

After analyzing the parties’ submissions and noting that the Bankruptcy and Insolvency Act (“BIA”) is silent regarding such situations, Madam Justice Gerow decided the matter in accordance with the court’s inherent jurisdiction.  She noted that there were a number of other “net winners” who also wished to settle with the trustee on similar terms, so, approving the Tang settlement would allow the trustee to move forward in negotiations with those other investors willing to pay back their profits in exchange for a full and final release.  In the end, Justice Gerow concluded that attempting to have the “net winners” disgorge their profits in exchange for a release is sound and in keeping with the objectives of the BIA.  However, she also noted that the approval of the settlement did not set a precedent whereby a trustee would be precluded from commencing legal proceedings against other net winners, seeking the return of both the profit and invested capital, if the trustee determined it would be appropriate to do so.

In the end, while the court decided the matter on relatively narrow grounds under the BIA, the case nonetheless provides an interesting example of some of the exercises in “lifeboat ethics” required of the courts when dealing with “winners” and “losers” in the context of alleged Ponzi schemes.

* The author wishes to thank Alexandra Lewis, Student-at-Law, for her assistance with this posting.