When a Ponzi scheme collapses, there will typically be net winners and net losers. The bankruptcy trustee will often seek to force the net winners - those who received more money back from the Ponzi scheme than they invested - to disgorge their profits. Courts diverge on whether they should compel disgorgement in this instance. This Note argues that under prevailing fraudulent transfer law, net winners in a Ponzi scheme need not disgorge their profits. This is because the investor's dollar-for-dollar discharge of a preexisting debt constitutes the transfer of value in exchange for the payout. There are two exceptions to this rule: where the payouts are objectively excessive and where the investor is an equity holder rather than a debtholder. This framework is sound as a matter of policy, despite the fact that it is not always entirely fair because it provides greater certainty in commercial transactions.
Spencer A. Winters,
The Law of Ponzi Payouts,
Mich. L. Rev.
Available at: http://repository.law.umich.edu/mlr/vol111/iss1/4