August 21, 2019

Colorado Supreme Court: Innocent Investor to Ponzi Scheme Lacks Any Right to Return on Investment

The Colorado Supreme Court issued its opinion in Lewis v. Taylor on Monday, September 17, 2018.

Uniform Fraudulent Transfer Act—Ponzi Schemes—Reasonably Equivalent Value.

The supreme court held that under the Colorado Uniform Fraudulent Transfer Act (CUFTA), an innocent investor who profits from his investment in an equity-type Ponzi scheme, lacking any right to a return on investment, does not provide reasonably equivalent value based simply on the time value of his investment. Here, an investor unwittingly invested in a Ponzi scheme. Before the scheme’s collapse, he withdrew his entire investment, plus a profit. A court-appointed receiver sued to claw back the investor’s profits under CUFTA, C.R.S. § 38-8-105(1)(a), which provides that a “transfer made . . . by a debtor is fraudulent as to a creditor . . . if the debtor made the transfer . . . [w]ith actual intent to hinder, delay, or defraud any creditor of the debtor.” The investor raised an affirmative defense, C.R.S. § 38-8-109(1), contending that he could keep his profit because he “took in good faith and for a reasonably equivalent value.” Because the time value of money is not a source of “value” under CUFTA and equity investors have no guarantee of any return on their investments, the court concluded that the investor did not provide “reasonably equivalent value” in exchange for his profit. Accordingly, the court reversed the court of appeals’ judgment.

Summary provided courtesy of Colorado Lawyer.

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