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Ponzi scheme victims unite, steer bankruptcy to help each other

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California real estate mogul Kenneth Casey defrauded more than 1,300 investors out of hundreds of millions of dollars in a Ponzi scheme. Now its victims are taking control in a Chapter 11 so collaborative that it has stunned seasoned bankruptcy lawyers.

“It’s a process I’ve never seen before,” said Michael I. Goldberg of Akerman LLP, a specialist in Ponzi schemes and involved in the case. “The victims here are truly incredible. ”

The scheme, which was not revealed until Casey’s death in May 2020, sparked a Chapter 11 case when seven defrauded investors forced one of Casey’s companies into involuntary bankruptcy. A subsidiary voluntarily filed ten days later, and dozens of related entity bankruptcy cases were finally consolidated.

Northern District of California Bankruptcy Court to Consider “One-Pot” Bankruptcy on Thursday plan which would pool all the assets and distribute the proceeds equally among the victims, regardless of the type of investment made.

Bankrupt creditors often clash to get as many limited assets as possible. In this case, the investors coordinated from the start and decided that they would all gain more from working together.

Their initiatives provide a model in other bankruptcies involving victims of crime, bankruptcy professionals have said. A law firm has already adopted investor methods to change its commitment to survivors of abuse in the Boy Scouts of America bankruptcy.

The investors in the Casey scheme have piloted every step of the bankruptcy process. Meeting weekly on Zoom calls with up to 700 participants, they organized votes to hire professionals, filed objections in court, and insisted on strategies favoring cooperation over conflict.

“The idea was for the victims to take care of each other,” said Robbin Itkin of Sklar Kirsh LLP, a lawyer on one of the two ad hoc committees that represent investors. The aim was that “no one would be more devastated”.

Investors expect to recover 35% to 50% of the estimated $ 300 million owed to them, according to lawyers and court records. Part of the amount recovered may be subject to recovery if investors unintentionally obtained more from the Ponzi scheme than what they invested. 99.8% of creditors voted in favor of the plan.

Predictable returns

Casey offered various ways to invest in his two companies based in Novato, California, Professional Financial Investors Inc. and Professional Investors Security Fund Inc.

Investors could use several different vehicles to invest money in any of 40 business entities that owned some 70 apartment and office buildings in Marin and Sonoma counties in northern California.

The returns were so predictable that investors relied on them like Social Security payments, said Cecily A. Dumas of Baker & Hostetler LLP, who represents an ad hoc group of victims who invested by buying acts of trust. These investors believed their money was securely secured by real estate liens, Dumas said.

In reality, Casey, who had previously spent time in jail for tax evasion and bank fraud, was mixing all the funds he had cashed out.

“No matter which property was generating the money, they were using all the money available to pay the bonds,” Dumas said. “There was no rhyme or reason as to how they used this money.”

In a plea deal reached in December, former PFI CEO Lewis Wallach admitted to help Casey run the program, and to embezzle $ 26 million for himself.

“Shared benefit”

The scheme fell apart when Casey passed away and his ex-wife, who was made a trustee, hired a law firm to transfer the business. Acknowledging financial irregularities, the company notified the Securities and Exchange Commission and sent a letter to investors.

“It was a scary letter,” said Keith Merron, a 64-year-old investor who has lost almost all of his retirement savings.

Merron didn’t want to wait and see how things unfolded. In less than 24 hours, he organized a Zoom call with several dozen investors.

“As we pooled our knowledge, it dawned on me pretty quickly that there was a great danger of shooting each other in the foot,” Merron said. “There was a risk that we would all hurt each other if we all trained together. I said, ‘Let’s not do this. Let’s think about our common advantage. ‘ “

Investors leveraged the professional expertise of the community, forming groups of volunteers to review lawyers, research property values, analyze the business, and research other investors.

They created a website, several Facebook groups and a Joinit.org database which has accumulated more than 950 names.

To alleviate conflicts, they have formed ad hoc committees for different types of investments so that everyone has an attorney in the case of bankruptcy. Then they only hired lawyers who are committed to working with each other, Merron said. In bankruptcy cases, ad hoc committees are usually formed independently by groups of like-minded creditors who want their interests to be heard.

“We wanted them to be collaborators,” he said. “It was the strategy from the start. “

In addition to forming the ad hoc committees, investors have volunteered to serve on the official Unsecured Creditors Committee, which is selected through a formal process and has a fiduciary duty to all creditors in bankruptcy.

Hundreds of investors

An investor contacted Goldberg, who heads Akerman’s fraud and collection practice.

“I get a Zoom call a few days later and I’m shocked. There are about 400, ”said Goldberg, who spent three hours answering questions.

The US Trustee’s Office, the Justice Department’s bankruptcy watchdog, has decided to appoint a trustee in the case. But investors objected and sought to appoint Goldberg as an independent director of the failing companies. After investors filed a petition with 868 signatures, the court dismissed the US trustee’s petition.

Volunteers sifted through investor questions on the website each week and forwarded them to the committees. Lawyers representing the three investor committees met weekly to coordinate efforts and prepare for the questions they planned to answer on the evening call.

Debra Grassgreen of Pachulski Stang Ziehl & Jones LLP, who represents the official unsecured creditors committee, never imagined she would do weekly Q&A to answer hundreds of investor questions “on the fly.”

“My initial instinct was to back off,” Grassgreen said. Then she realized that transparency helped everyone work through the process.

The format inspired her company, which also represents survivors of abuse in the bankruptcy of the Boy Scouts, to hold online town halls that drew thousands of people, she said. The format provides victims with a safe place to share and get questions answered while maintaining anonymity, she said.

Some PFI investors in a recent Zoom call seemed deflated when Grassgreen told them they wouldn’t need to meet as often once the company’s Chapter 11 plan was confirmed, she said. declared. “One woman shouted, ‘I have a little abandonment syndrome,’ Grassgreen recalls.

“They created a community, bonded by this terrible experience that they all went through, and they all helped each other,” Grassgreen said. “They started it, we continued it and it worked.”