Alleged Ponzi-Schemer's Ex Wins Asset Freeze Dismissal
Divorcing a Ponzi-schemer offers greater financial stability than marrying a Ponzi-schemer.
Last week, the Second Circuit Court of Appeals ordered two federal agencies to un-freeze the ill-gotten gains that an alleged-Ponzi schemer’s ex-wife received through their divorce settlement. Unlike the still-married Ruth Madoff, who forfeited $80 million following husband Bernie Madoff’s arrest, this ex-wife may have a shot at keeping the funds.
Janet Schaberg was married to Stephen Walsh for more than two decades. By the time of their separation in 2004, Walsh had amassed a substantial fortune and the two negotiated a settlement that gave Schaberg a not-insubstantial fortune of her own.
Under that settlement, finalized in 2006, Walsh agreed to pay Schaberg $12.5 million in biannual installments through 2020 and to allow Schaberg to keep nearly $5 million held in several checking accounts during the marriage. Both parties waived further rights to each other's assets. In 2008, Schaberg remarried and adopted her current name.
In 2009, the CFTC and the SEC accused Walsh of operating a Ponzi scheme through which he and a partner fleeced investors of as much as $554 million. The Agencies sued not only Walsh, but Schaberg.
The Agencies did not allege that Schaberg committed, or even had knowledge of, any wrongdoing; only that she possessed the proceeds of that wrongdoing - transferred directly to her from the investment entity in question - and should have to disgorge those proceeds to pay the defrauded investors.
The district court granted preliminary injunctions to the Commodity Futures Trading Commission and the Securities and Exchange Commission (Agencies, collectively) freezing the bulk of Schaberg's assets. Schaberg appealed.
In New York, proceeds of fraud can constitute marital property. Furthermore, an original owner cannot follow monies obtained by fraud into the hands of an innocent former spouse who now holds them, (or assets derived from them), as a result of a divorce proceeding where that spouse, in good faith and without knowledge of the fraud, gave fair consideration for the transferred property.
The New York Court of Appeals previously ruled that the Agencies may obtain disgorgement of ill-gotten funds only to the extent that a relief defendant like Schaberg lacks a legitimate claim to them. Schaberg, however, received the assets only when they were transferred to her under the separation agreement. Since she was a good faith purchaser for value, the Second Circuit Court of Appeal ruled that her assets are immune from disgorgement.
While Schaberg's assets are safe for now, it does not mean that they are safe forever. The Second Circuit Court of Appeals only said that the Agencies' asset freeze against Schaberg could not continue; it did not stop the Agencies from seeking a new freeze on the marital assets.
Related Resources:
- Commodity Futures Trading Commission v. Walsh (FindLaw's CaseLaw)
- Madoff Relatives Agree To Asset Freeze (Gothamist)
- Size Matters: Madoff Victims Lose Appeal Due to 15-Page Limit? (FindLaw's Second Circuit blog)
