Vaughan clawback costs eat up restitution

But the progress is coming at such a relatively high cost that, according to one analysis, Vaughan’s victims are looking at recovering about a nickel on every dollar invested.

Clawbacks, which are basically civil lawsuits for money owed, are not uncommon in business bankruptcies, but the 160 filed primarily against individuals in the Vaughan Company Realtors bankruptcy case were unprecedented in New Mexico.

	Recent clawback settlements The following are recent out-of-court settlements of clawbacks in the Vaughan Company Realtors bankruptcy case approved by Bankruptcy Court Judge Robert Jacobvitz. As a rule, the investors admit to no wrongdoing or liability: - Paul B. and Anne R. Almquist of Farmington, $8,000. - Michelle Cunningham of Albuquerque, $65,000. - Mach family (Warren, Marsha and Tyler Mach; Chase and Amanda Looker) of Salt Lake City, $107,500. - Kenneth Otteni of Albuquerque and family-related entities, $65,000.

About 110 of the clawbacks are still being contested in both U.S. District Court and Bankruptcy Court in Albuquerque. The remainder have been settled one way or another.

As in the Bernard L. Madoff Investment Securities bankruptcy case, the clawbacks in the Vaughan Company Realtors case have been controversial since they target mostly fraud victims. The clawbacks seek the return of payments made before the Ponzi scheme fell apart.

Where the money goes

The money will go first to paying administrative, legal and other court-related costs, then second to provide compensation to eligible victims. The clawbacks appear to be the only realistic way for hundreds of Vaughan investors to recover any of their losses.

Vaughan, who is serving a 12-year federal prison sentence, scammed $75 million from upwards of 600 investors in a long-running investment fraud that finally collapsed in February 2010 when he and his company filed for bankruptcy.

A trustee, forensic accountant Judith Wagner, was appointed in April 2010 to take charge of the Vaughan Company Realtors bankruptcy estate. The first clawbacks appeared before the year was out.

The clawback effort began with sending out “demand letters” to 183 investors giving them a chance to settle her clawback claims out of court, according to a report filed by Wagner in Bankruptcy Court.

Based on a copy provided to the Journal, the demand letters were intimidating to read, especially for someone with little legal experience or knowledge. Wagner was able to settle about 43 potential clawbacks just from the letters, the report says.

Types of targets

The report says the 160 clawbacks targeted three types of investors:

♦ So-called “net gainers” who received “a meaningfully larger amount” in payments from Vaughan than they originally invested with him.

♦ Investors who Wagner believes “lacked good faith” in investing with Vaughan, typically getting what she has in the past described as “unrealistically high” rates of return on their investments.

♦ Investors who supported Vaughan’s scheme in some way, either referring new investors, serving as a reference or otherwise endorsing it.

Investors loaned money to Vaughan in return for promissory notes issued through Vaughan Company Realtors. The notes guaranteed rates of return ranging from 8 percent to 40 percent a year in most cases.

Investors thought their money was being used to finance real-estate deals. Instead, Vaughan perpetuated his Ponzi scheme, using money put up by later investors to pay fake profits to earlier ones. He also used investor money to fund an indulgent lifestyle and shore up his money-losing businesses.

Albuquerque investor Julius Wollen, an alleged net gainer who is fighting a clawback, has initiated a legal effort to convert the Vaughan Company Realtors bankruptcy case from a Chapter 11 reorganization to a Chapter 7 liquidation.

Fighting back

The motion to convert the case has been interpreted as a strategy to short-circuit the clawback campaign because, if successful, Wagner would be out of her job as Chapter 11 trustee. A two-day hearing on the motion was held in the last week of February in Bankruptcy Court, although a decision is not expected until April.

“The courtroom was empty,” said James Askew, who is one of Wagner’s lawyers. “There were no other creditors, no other attorneys there. If they really wanted her out, why didn’t they band together at this hearing?”

In a filing from early January to support the motion to convert the case, veteran bankruptcy lawyer Louis Puccini Jr. says the trustee has collected about $3,528,571 in clawback and other settlements against $2,636,349 in administrative and legal costs.

“Therefore, expenses have averaged about 67 percent of recovery so far,” he says.

Posing the scenario that the trustee ultimately collects $10 million while continuing to incur the same level of overhead costs, Puccini says, “Under this example, creditors would receive 4.76 percent of their claim.”

The clawbacks would normally have all been heard by a judge in Bankruptcy Court, but roughly half of the defendants exercised a rarely used legal right to move their cases to federal District Court. The apparent strategy is to seek a trial by jury.

Mediation

The cases in District Court have been going through a court-ordered opening step of mediation. Out of the 57 clawback cases there, Askew said mediation has so far resulted in six pending settlements worth $451,500 to the Vaughan Company Realtors bankruptcy estate.

In Bankruptcy Court, which also has about 57 clawback cases, Judge Robert Jacobvitz has steadily been addressing the complicated legal arguments that come into play with clawback litigation.

The legal arguments often involve the interplay of the Bankruptcy Code with other federal law and sometimes state law. Jacobvitz’s preliminary rulings basically toss out some arguments while finding other arguments credible enough to continue to trial.

Jacobvitz’s rulings will only apply to the clawback cases heard in Bankruptcy Court. As for the cases being heard in District Court, Judge William P. Johnson will issue his own rulings.
— This article appeared on page 11 of the Albuquerque Journal