Settlement Allows Ponzi Scheme Victims To Recoup From ‘Net Winners’

In a case that marks the first time a class has ever been certified under the Pennsylvania Uniform Fraudulent Transfer Act, a federal judge has approved a settlement that will allow a group of investors who lost thousands of dollars in a Ponzi scheme to recoup about $740,000 from other investors who profited from the scheme.

Attorneys for the class said they were not aware of any other class actions ever certified under any state’s version of the Uniform Fraudulent Transfer Act, which allows for the return of funds lost through fraudulent transactions.

The class members in this case were investors seeking to claw back the investments they lost in a Ponzi scheme from the defendant investors who were “net winners” in the scheme.

On Oct. 19, U.S. District Judge Mary A. McLaughlin of the Eastern District of Pennsylvania certified the class and approved a partial settlement in which 37 percent of the approximately 150 defendants – along with five nondefendants – agreed to pay almost $740,000 into a settlement fund to be distributed pro rata among the approximately 2,600 class members minus 33.3 percent for attorney fees.

According to class counsel Simon Bahne Paris of Saltz Mongeluzzi & Bendesky in Philadelphia, the fund will be divvied up according to each class member’s initial investment.

Paris said the net winners had “no real defense against PUFTA” because the act requires that any profits obtained through fraudulent means be returned and because the mere existence of a Ponzi scheme is sufficient to establish the actual intent to defraud that is required under PUFTA.

Under the settlement agreement, according to Paris, the net winners are not required to relinquish their initial investments, but must repay a substantial percentage – at least 80 percent and, in some cases, 95 percent – of their profits.

In Carroll v. Stettler, according to the class action complaint, class representatives Thomas Carroll and Kimberly Baker filed a suit alleging they had lost their entire $57,000 investment in a Ponzi scheme orchestrated by Lizette Morice and her company, Gaddel Enterprises Inc.

According to the complaint, Morice had falsely claimed to investors that her company purchased foreclosed properties and resold them to large corporations at a profit.

According to the complaint, Morice was sentenced in 2009 to 120 months in prison and ordered to pay about $7.3 million in restitution at a rate of $25 per quarter, which would have taken about 71,500 years.

The class was defined in the settlement agreement as “all persons or entities who invested with Gaddel since April 1, 2006, and incurred a net loss, excluding the defendants and any Gaddel officers, employees or affiliates,” according to McLaughlin’s memorandum.

The class named as defendants both the orchestrators of the Ponzi scheme – classified in the complaint as the “Gaddel insiders” – and the investors who profited through the scheme – classified in the complaint as the “net winners” – McLaughlin wrote.

According to the complaint, the Gaddel insiders were Morice, James Martin, Fausto V. Santana, William Stettler III and Albie E. Delgado.

The complaint alleged Morice was the founder and operator of Gaddel, while Stettler was the company’s vice president who netted $265,000 on his $5,000 investment in the Ponzi scheme.

Santana was a Gaddel employee who netted $57,000 on his initial $9,000 investment, as well as an additional $33,000 on a $5,000 investment he made under the moniker ADO Investment Corp., according to the complaint.

Martin, meanwhile, was a sales agent for Gaddel who invested $3,000 in the company and netted $30,000, the complaint alleged.

Delgado was a real estate consultant and director for Gaddel who invested $1,000 in the company and netted $35,000 in profits, according to the complaint.

Paris said none of the Gaddel insiders were included in the settlement.

They will now be litigated against along with the other remaining defendants, he said.

According to court documents, McLaughlin granted preliminary approval of the settlement for a first wave of defendants in May, and then for a second wave of defendants in July.

In her final approval of the settlement on Oct. 19, McLaughlin also approved litigation expenses in the amount of $21,000 and incentive awards of $2,500 each for Carroll and Baker.

Paris, who tried the case with Charles J. Kocher of Saltz Mongeluzzi, said he felt “great” about the settlement, particularly since the plaintiffs had no other viable alternative to recover their lost investments.

Zachary S. Davis of Obermayer Rebmann Maxwell & Hippel in Philadelphia, who represented several of the defendants who settled, could not be reached for comment at press time.

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