October 2012 Vol. 111 No. 1 THE REVIEW

The Law of Ponzi Payouts

Spencer A. Winters

When a Ponzi scheme collapses, there will typically be net winners and net losers. The bankruptcy trustee will often seek to force the net winners-those who received more money back from the Ponzi scheme than they invested-to disgorge their profits. Courts diverge on whether they should compel disgorgement in this instance. This Note argues that under prevailing fraudulent transfer law, net winners in a Ponzi scheme need not disgorge their profits. This is because the investor's dollar-for-dollar discharge of a preexisting debt constitutes the transfer of value in exchange for the payout. There are two exceptions to this rule: where the payouts are objectively excessive and where the investor is an equity holder rather than a debtholder. This framework is sound as a matter of policy, despite the fact that it is not always entirely fair, because it provides greater certainty in commercial transactions.

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