What is a Clawback Suit?

Ponzi schemes endanger investors and securities professionals, but these victims are not without recourse. Investors who fell victim to such schemes may pursue compensation from the brokers and other entities that perpetrated the fraud. They may also bring a clawback suit.  A Clawback suit allows them to seek compensation from the early investors who either knowingly or unknowingly benefited from their early involvement.

A common type of clawback suit is brought through federal equity receivers or bankruptcy trustees. These cases are based on several sections of the United Stated Bankruptcy Code, allowing investors to recover false profits that were paid to investors in order to redistribute these funds to investors that lost the principal on their investment.  They are not unique to just Ponzi scheme cases, but rather, can be used in instances where large partnerships dissolve and leave large outstanding debts.

An example of a clawback suit is the recent case against former law firm partners at Dewey & LeBoeuf LLP. Last month, a bankruptcy judge did not dismiss lawsuits against former partners of the firm. The defunct firm’s creditors are seeking nearly $16 million, hoping to obtain, or “clawback,” any money the partners were paid while the firm was insolvent

The judge hearing the arguments found that the partners cannot argue that the value of the work they did offsets the money they were paid, a defense that is sometimes successful in such clawback suits. For example, if a partner who brought in $2 million in fees and received $1 million in payment during the same period could argue that he or she would not owe the bankrupt firm anything.

Following the court’s decision that creditors can clawback funds, the next decision will consider when the firm became unable to pay its debts as they came due.

Ezer Williamson Law provides a wide range of both transactional and litigation services to individuals and businesses. We have successfully prosecuted and defended various types of business and property claims. Contact us at (310) 277-7747 to see how we can help you with your business law concerns.

Protecting Your Business from Defamation

Consumer review based websites like Yelp have grown in popularity and power. Consumer voices are often trusted, and a bad online review can have costly consequences. However, online anonymity has led to abuse, and if someone has posted an online review about your business that is false there may be legal recourse for your injuries.

Defamation is an action brought to defend reputation. It involves intentional publication of false, defamatory, and unprivileged information that has a tendency to injure or cause special damage.

One recent case involving defamation claims, mLogica, Inc., et al., v. Pankaj Karan, CA Super. Ct. No. 30-2010-00342873 (December 30, 2013), shows how defamation for online activity works.  Two companies entered into a contract for the creation of some custom software. The party purchasing the software posted numerous negative reviews about the other company on its blog, and emailed its business partners and customers alleging that the software was delivered late and that the company employees were “swindlers” who “milked many of their clients of money and time.” The emails were very damaging to the company’s reputation in the industry, caused many projects to be cut, and a resulted in a significant loss of income.

While truth is an insurmountable defense in defamation actions,  the software company was able to show at trial that the software was fully functional and delivered on time. Furthermore, at trial, the defendant could not identify one unpaid vendor or defrauded customer.

A jury in Orange County, California awarded $1.23 million  to the software company for the damage to its reputation. The decision and verdict were affirmed on appeal.  In fact, the appellate court believed that the evidence supported damages of  “about $10 million. Maybe more.”

This case shows that there is a balance between preventing people from being critical on the Internet, and limiting false speech that does not promote the “marketplace of ideas.”

Ezer Williamson Law provides a wide range of both transactional and litigation services to individuals and businesses. Contact us at (310) 277-7747 to see how we can help you with any business dispute concerns you may have.