The Ninth Circuit recently issued an unpublished decision in Hoffman v. Markowitz, Case No. 17-56290 (C.D. Cal., Dec. 24, 2018), holding that referral fees paid from a Ponzi scheme are subject to avoidance under the California Uniform Voidable Transactions Act (CUVTA) because referring investors to a Ponzi scheme, by itself, does not confer reasonably equivalent value.
While this decision is unpublished and does not establish a per se rule, it provides valuable authority for creditors, bankruptcy trustees, and receivers seeking recovery of fees paid to third parties for referring investors to a Ponzi scheme. In such situations, the onus rests on recipients of such referral fees to prove they provided something of value beyond the mere referral. Read the decision here.
Pursuant to the CUVTA, a transfer is voidable when made with either actual or constructive intent to defraud unless the transferee received the transfer in good faith and provided reasonably equivalent value in exchange. Cal. Civ. Code §§ 3439.04(a); 3439.08(a). Where the transfer is made from a Ponzi scheme in the form of referral fees paid to third parties, a circuit split exists as to whether such services, which only serve to perpetuate the underlying fraud, can confer any value to the scheme. Compare In re Fin. Federated Title & Trust, Inc., 309 F.3d 1325 (11th Cir. 2002) (holding that there is no per se rule that services furthering a Ponzi scheme are without value), with Warfield v. Byron, 436 F.3d 551 (5th Cir. 2006) (holding that referral services for a Ponzi scheme are per se voidable because they provide no value to the Ponzi scheme as a matter of law).
In Hoffman v. Markowitz, a receiver sued Markowitz, a third party who had received approximately $750,000 in fees for referring new investors to the Ponzi scheme. The receiver brought a motion for summary judgment on his claim for fraudulent transfer under the CUVTA. The District Court entered judgment in the receiver's favor for the full $750,000. Markowitz appealed.
While the Ninth Circuit recognized the split in authority in Hoffman v. Markowitz, it declined to establish a per se rule. However, the Court found the reasoning in Warfield to be persuasive and held that, on the facts of the case where the only service provided by the transferee was to refer others to the Ponzi scheme, such referrals do not constitute "reasonably equivalent value[.]" On this basis, the Court affirmed the District Court's judgment in favor of the Receiver. Notably, the concurring opinion issued by D.W. Nelson, Circuit Judge, goes further, fully adopting the Fifth Circuit's decision in Warfield that payments for referrals to a Ponzi scheme are per se voidable because such referrals confer no value to the underlying enterprise when viewed from the standpoint of the enterprise's investors and creditors, as required under the CUVTA.