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6th Circuit Affirms Summary Judgment in Ponzi Scheme Case

The 6th U.S. Circuit Court of Appeals affirmed a district court's entry of summary judgment for the SEC in a civil action arising from an alleged $75 million Ponzi scheme. As alleged, under the scheme, investor funds were purportedly invested in a "secretive European securities market."

According to the court, the SEC produced sufficient evidence to establish liability. The court found that the principals, all formerly affiliated with a large trading firm, solicited numerous investors, held themselves out as intermediaries between the investors and the purported trading programs and received transaction-related compensation without registering as brokers.

Documents offered by the principals did not offer any substantive proof that the investment program was legitimate. Personal denials of the allegations did not suffice by themselves to create a question of material fact, concluded the panel. Despite the experience of all of the principals in the securities industry, none of them witnessed or received any documentation confirming that securities had been traded or independently verified the legitimacy of the scheme.

While most investors lost substantial amounts of money, 41 investors reported gains. The SEC ordered these funds to be disgorged and combined into an investor relief fund. Several of these relief defendants appealed this holding, but the panel found that the SEC sufficiently demonstrated that the money received did not come from investments but from ill-gotten funds. Accordingly, the relief defendants could only receive the same pro rata share as other harmed investors.