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The biggest losers in former Albuquerque real estate executive Doug Vaughan’s Ponzi scheme will be first in line for partial restitution of their losses, according to a plan filed in the Vaughan Company Realtors bankruptcy case.
The plan lists 278 valid claims totaling just over $16.3 million from “restitution claimants,” or people who gave money to Vaughan from the mid-to-late 1980s through the 1990s in the belief he was using it for real estate investments.
As it turned out, Vaughan was running a scam.
The pot of money for paying restitution amounts to just over one-fifth of the total for valid claims. The money comes from the liquidation of assets as well as court judgments and settlements from a type of civil lawsuit called clawbacks that had been filed in the case.
As of the end of March, the Vaughan Company Realtors bankruptcy estate had about $3.6 million in cash, according to its most recent operating report. The estate represents the only hope for Vaughan’s victims to get any restitution for their investment losses.
The amount and timing of the restitution payments to individual investors remains up in the air. The plan, filed last week, must go through a months-long confirmation process that includes a vote by those claiming restitution.
The prospect of payments in the five-year-old bankruptcy case has attracted the attention of speculators that buy valid claims from creditors in bankruptcy cases for low-ball prices. The speculation is that the eventual payouts in the cases will be high enough to provide a profit.
“We offer creditors the ability to receive a guaranteed amount of money for their claim in short order, instead of having to wait out the bankruptcy case for an unknown payout,” Matthew Binstock of New York City-based Argo Partners told the Journal in an email.
As of Friday, Argo Partners had filed 15 transfers of claim in Bankruptcy Court, meaning they had successfully purchased the claims of 15 of Vaughan’s victims awaiting restitution. The purchases occur outside the court system and are legal.
“Purchasing claims is not very common here, but it is common in larger cases in other parts of the country,” said James Askew, one of the lawyers for the Vaughan Company Realtors bankruptcy estate.
Filed by Judith Wagner, the court-appointed trustee in charge of the estate, the amended plan of liquidation filed in Bankruptcy Court in Albuquerque proposes a way to divvy up the limited funds using what’s called the “rising tide” method. Contrary to the adage that “a rising tide lifts all boats,” the rising tide method of distribution in a Ponzi scheme case means roughly that a rising tide lifts the lowest-lying boats first.
“Ms. Wagner researched and analyzed a variety of distribution methods and believes the rising tide method is the fairest way to balance the interests of the restitution claimants, given the facts and circumstances of this case,” Askew said.
Vaughan ran a classic Ponzi scheme that defrauded 600 investors out of $75 million, according to civil and criminal investigations. A Ponzi scheme is a kind of investment scam in which money put up by later investors is used to pay fake profits to earlier ones.
Early investors in a Ponzi scheme, especially if they were getting a high rate of return, can make a profit. On the other hand, late investors will lose most or all of their money because the payments of fake profits get cut short by the inevitable collapse of such schemes.
For example, five of the 278 valid claims in the case received no payments whatsover from Vaughan, including one claim involving an investment of about $50,000. In all likelihood, those five investors were Vaughan’s last ones before the collapse.
Wagner’s rising tide plan would first pay Vaughan investors who got the lowest fake returns on their original investments, regardless of the size of the investments. In other words, the plan says, restitution will be “in proportion to their relative loss.”
The 278 valid claims include only investors who lost money in the scam. Because of the limited pot of money, it would appear unlikely restitution will be made to investors who were paid enough fake profits to recover half or more of their original investments.
“There is no guarantee that all restitution claimants will receive a distribution,” the liquidation plan says.
Vaughan was a well-known businessman when he and his flagship company, Vaughan Company Realtors, filed for bankruptcy court protection in February 2010. Revelations of the Ponzi scheme surfaced immediately, although he denied the allegations.
He was charged with 30 criminal counts ranging from wire and mail fraud to money laundering in February 2011. In December of that year in U.S. District Court, Vaughan entered a guilty plea on two counts of fraud.
When Vaughan was sentenced to 12 years in federal prison in September 2012, Chief Judge Bruce D. Black described him as “the most infamous criminal in New Mexico history.”