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‘Unrealistic’ returns provide evidence

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A pair of judicial opinions in U.S. Bankruptcy Court in Albuquerque have begun to shed some light on the legal issues behind the civil lawsuits commonly called clawbacks filed against victims of the biggest Ponzi scheme in New Mexico history.

Clawbacks, which are not uncommon in business bankruptcy cases, can take on a spiteful or punitive tone when used in bankruptcy cases involving Ponzi schemes. In the Vaughan Company Realtors case, the scheme was operated for the better part of two decades by company founder Doug Vaughan.

The court-appointed trustee in the Vaughan Company Realtors case, Judith Wagner, had 125 active clawbacks pending as of August in both Bankruptcy Court and federal District Court. Since that time, some of the cases have been settled while additional clawback lawsuits have been filed.

The mantra from people targeted by the clawback lawsuits is that they are being victimized twice, first by Vaughan and a second time by Wagner.

The red flags raised by Bernie Madoff’s massive Ponzi scheme, which imploded 14 months ahead of the collapse of Vaughan’s scheme, could challenge the moral high ground claimed by most, if not all, Vaughan investors who are fighting the clawbacks.

The vast majority of Vaughan’s promissory notes guaranteed annual returns of 8 percent to as high as 40 percent, which compares to a general range of 10 percent to 17 percent for Madoff’s bogus investment securities. In her lawsuits, Wagner calls the upper range of Vaughan’s returns “unrealistically high.”

In a memorandum opinion issued in August, Bankruptcy Judge Robert Jacobvitz gives preliminary credence to Wagner’s argument that the combination of publicity about the Madoff scandal and Vaughan’s high interest rates might serve to incriminate some Vaughan investors.

“These allegations are sufficient to state a plausible claim that defendants had actual knowledge of the fraud and subjectively knew that they were participating in a fraudulent scheme,” Jacobvitz says.

Jacobvitz’s opinion applied to just one clawback case but, at least hypothetically, could be extended to all the clawback cases being heard in Bankruptcy Court.

Memorandum opinions are not court orders or official rulings, but rather represent a judge’s view of legal or factual issues in a case. The immediate audience for the opinions is lawyers involved in the particular case, although their broader function is to serve as legal precedent.

In the Vaughan Company Realtors case, Jacobvitz appears to be clarifying which of Wagner’s legal arguments in the clawback lawsuits have moved “across the line from conceivable to plausible.”

In an opinion filed in October in another clawback case, the judge says the lawsuit makes a “plausible claim” that Vaughan Company Realtors operated as a Ponzi scheme with the “actual intent to defraud.” The fraudulent intent was on the part of the company, not the investor receiving bogus payments.

Going a step further, Jacobvitz says the trustee’s lawsuit provides sufficient information to connect the defendant to the Ponzi scheme by virtue of details about her investment.

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