Friday, August 20, 2010

Lawyers Must Disgorge Fees From Ponzi Scheme

On Tuesday, the United States Court of Appeals for the Ninth Circuit affirmed the district court’s finding that a lawyer should have known that a $375,000.00 non-refundable flat fee received from his client was paid with the ill-gotten gains of a Ponzi scheme. As a result, the district court’s order imposing a constructive trust upon $238,300.00 of the fee was not an abuse of discretion or legally erroneous. (Federal Trade Commission v. Network Services Depot, Inc. (2010) 2010 U.S. App. Lexis 17080).

This is an important decision for clients of the Law Offices of James F. Lindsay who are trying to recover money lost as a result of unwittingly investing in a business that turns out to be a Ponzi scheme. (see www.jameslindsaylaw.com for more information). Far too often the principal perpetrator of the Ponzi scheme has squandered most of the funds invested in the scheme, so full recovery of the invested funds from the perpetrator is often impossible. However, where the perpetrator has tried to hide funds under the guise of payment of legal fees, Tuesday’s opinion provides the precedent for pursuing and recovering those fees from the perpetrator’s lawyer.

If it can be shown that the fees were paid from the proceeds of the Ponzi scheme, and the lawyer knew, or should have known, that the source of payment was from the scheme, then the lawyer will be required to disgorge all such fees.

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