by BETTER FARMING STAFF
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Last December when Iowa’s attorney general Tom Miller became one of four attorney generals to achieve a ban on further pigeon sales in their states he issued statement saying he could not find a “legitimate purpose for PKI pigeons “other than providing inventory for new growers in furtherance of a ‘Ponzi’ type of investment scheme.”
Typically as the dust settles after the collapse of a Ponzi, legal experts say often hundreds, if not thousands of victims emerge and countless dollars disappear forever.
While those who get involved earlier on in the scheme may see a return on their initial investments, those jumping in last are not usually so lucky. (Named after Charles Ponzi, who convinced 10,550 investors in 1920s Boston to invest US$9.8 million in a scheme that played on the value of international postal reply coupons in different currencies, the hallmark of a Ponzi is using money from new investors to pay off earlier investors, making its eventual collapse inevitable).
That may be changing, given some strategies that have been employed in recent years within the U.S. concerning such schemes.
Alaskan Ponzi victims recover half their money
Recently in Alaska, a bankruptcy trustee recovered about 50 per cent of the money lost by investors in a Ponzi that operated in the 1990s.
Operated by RaeJean Bonham of Fairbanks, Alaska, the Atlantic Pacific Funding Corporation and World Plus Inc. claimed to sell discounted airline tickets obtained from ticket brokers. The company solicited investment by offering payment with interest, claiming it was being used to help buy large blocks of frequent flyer ticket miles from corporations. In reality, however, the money gained was being used to pay off earlier investors in the scheme.
In 1995, Bonham and her two businesses were forced into bankruptcy. There were more than 1,100 creditors. Net loss to investors was pegged at US$10 million. Court action ensued and in 1999, Bonham received a five-year prison sentence for running a Ponzi.
According to Anchorage Daily News reports, it was Alaska’s biggest investment scam, ever.
When the business went belly-up, the court appointed accountant Larry Compton as the bankruptcy trustee. To retrieve some of the money lost, Compton pursued the interest payments early investors received.
Legal records show that the argument he most often used to retrieve these funds was that the payments made to the earlier investors happened when the company was insolvent.
Compton and his legal team successfully argued that payments the early investors received during the last three months of the business were more than what they would have received if the company had declared bankruptcy.
Tennessee trustee demands all money back
The same principle is currently being applied to retrieve funds in another Ponzi scheme that was based in Tennessee.
The scheme was run by the late Robert McLean, a former stockbroker, through his company McLean & Company Investments. It collapsed after several of McLean’s clients filed lawsuits against him in the summer of 2007. McLean shot himself in September 2007.
In May 2008, the NashvillePost.com reported that Bob Waldschmidt, who had been appointed the business’ bankruptcy trustee, filed suits against more than 50 people who had invested money into the promissory notes McLean sold. The notes purported to offer a high rate of return.
However, Waldschmidt claims the notes were really a way to invite new investment to pay back other investment obligations, what is termed in the United States as “fraudulent conveyances.”
Unlike the Alaska case, where the recovery effort focused on the interest paid, Waldschmidt is arguing investors return all payments made to them so the money can be divided fairly among them. In a statement released to the NashvillePost.com, he says he plans to take into account all payments over the business’ four-year existence.
“There are massive inequities between the amount of repayments received by some vs. (sic) the lack of repayments received by others. Equitably, all payments should be returned to ‘one pot’ and distributed ‘fairly,’ on a pro-rata basis, to all those who lost money,” his statement said.
The Canadian way
Would such an approach work to recover funds from such a scheme if it were to occur in Canada?
Steven Sofer, a lawyer with the Toronto-based firm Gowlings, was lead plaintiff counsel in an action brought by 200 investors who were victims of an alleged Ponzi scheme against lawyers, accountants, financial institutions and others. He says bankruptcy trustees in Canada could pursue the approach taken by Waldschmidt.
Wes Cowan, manager of PricewaterhouseCooper’s Kitchener-Waterloo office says he understands the logic of the argument being used in the United States and says there are provisions in the Bankruptcy Act as well in provincial acts that prevent fraudulent conveyances.
“One of those might be able to be used as a way to recover funds but it isn’t specifically laid out as it is I think in the U.S. provisions,” he says. He suggests that these laws may have not yet been tested under “under these circumstances (concerning a Ponzi) but may apply quite well.”
Dan Girardi, a vice-president with KPMG’s Kitchener-Waterloo office, also agrees that the possibility exists: “Because the law always has the ability to go beyond the substance and get to the crux of issues.”
Nevertheless, “there are some boundaries to it (the law),” he notes. “Obviously the further off the path you are the more serious the issue has to be.”
Could Pigeon King International investors be in for similar treatment in a recovery effort for some of the $23 million owed to creditors?
Susan Taves, a senior vice president with BDO Dunwoody Limited’s Kitchener-Waterloo office, declined to comment on the possibility. Taves is the bankruptcy trustee for PKI.
“At this point we are just getting involved,” she explained on Wednesday, the day Arlan Galbraith, PKI’s former owner filed for bankruptcy. “We would be reviewing all the books and records and trying to make comment about where the money has gone. And so wereally don’t have any information to comment on that right now.” BF
Important Note: © Copyright AgMedia Inc. Copyright for this article like all material on this website belongs to AgMedia Inc. Links to this site are welcome but this material may not be reproduced in whole or in part in any other publication or on any website.
Notice from Arlan Galbraith
PKI bookkeeper Joan Carter's "Final letter"
Ontario Ministry of Agriculture, Food and Rural Affairs Information for Pigeon Owners
PKI summary
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