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Lawyer's 'Ponzi' Capital Gains Must Be Repaid, Rules 10th Cir.

By Jonathan R. Tung, Esq. on December 03, 2015 | Last updated on March 21, 2019

An Illinois lawyer who 'earned' $34,500 on his original investment of $60,000 has been ordered to repay his profits from the ill conceived pay-day con. The lawyer had made the money through a Ponzi scheme orchestrated by Impact Payment Systems, LLC.

He's not the only one who was schnookered out of money. Over $47 million was raised by the owner of Impact from about 120 different investors for the purposes of helping Impact get off the ground only to later crash and burn.

Impact's Ponzi Scheme

Arthur S. Wulf, a licensed attorney who eventually represented himself pro se, paid $60K for 60,000 shares of a company called Impact Payment Systems. He was one of at least 120 other investors who had invested in Impact. In reality, Impact was nothing but a Ponzi scheme. Wulf later redeemed his stock for $94,500, giving him an apparent $34,500 in gains.

Wulf was not aware that Impact was nothing more than a "rob Peter to pay Paul" operation. Later, the SEC filed an action against John Scott Clark, the owner of Impact and Impact itself. In that enforcement action, the court appointed a receiver to collect Wulf's gains. Suit ensued.

Lower Level Court's Ruling

At the lower court, Wulf disputed the court's characterization of Impact as a Ponzi scheme, but he did so too late: he did not challenge the factual claims in the receiver's complaint against him (oops!).

He then sought another desperate tack by arguing that his fund transfer was different than all the other investors because he received no income and no dividends. Thus, he was not required to disgorge the profits from the one-sided fraudulent transfer. The court found this unavailing.

First, the district court said, it has been well established in the circuit that once a Ponzi scheme has been found, pretty much all money transfers within are fraudulent. Thus, any distinction between equity and debt holders gets severely diminished (applying Perkins v. Haines). Plus, an investor who invests in good faith is still "entitled only to the amount he initially provided to the [operation]" (quoting In re AFI Holding).


At the Tenth Circuit Court, Wulf further alleged that his receiver had spent well beyond $60,000 to regain and attempted to secure sanctions against him for abuse of discretion. The court found that this was not a violation of Federal Rule of Civil Procedure 11. This set the tone for the circuit: pretty much any means to recapture ill-gotten gains will be taken.

And there it is: investors who made a good-faith investment in a company that later turns out to be a con game must be prepared later to hand that money over to a court appointed receiver. The SEC could be knocking soon.

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