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.

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