## Facts

- J.T. Wallenbrock & Associates and Citadel Capital Management Group operated a Ponzi scheme promising “risk free” returns, including 20% every ninety days.
- Robert Kowell invested about $22,858.92 and later received aggregate payments exceeding $73,000.
- After an SEC enforcement action, a federal court placed the entities in receivership and appointed James H. Donell as receiver.
- Donell sued to recover Kowell’s payments above principal as fraudulent transfers under California’s Uniform Fraudulent Transfer Act (UFTA), Cal. Civ. Code § 3439.04.
- Kowell conceded the enterprise was fraudulent but argued he was a good-faith investor who could keep the profits or, alternatively, reduce any repayment by the federal income taxes he had paid on the reported profits.
- The district court (applying UFTA’s four-year limitations period) ordered Kowell to disgorge $26,396.10 in net profits plus $5,159.22 in prejudgment interest.

## Issues

1. Whether payments to an innocent investor exceeding return of principal in a Ponzi scheme are avoidable and recoverable as fraudulent transfers under California UFTA.
2. Whether a good-faith investor provides “reasonably equivalent value” for Ponzi-scheme profits such that the profits may be retained.
3. How UFTA’s four-year statute of limitations applies to a series of Ponzi-scheme transfers.
4. Whether the investor may offset disgorgement liability by federal income taxes paid on the fictitious profits.

## Decision

- The Ninth Circuit affirmed the judgment for the receiver.
- Transfers to Kowell exceeding his principal were recoverable as fraudulent transfers under UFTA.
- Good faith did not permit Kowell to retain profits because he provided no reasonably equivalent value for amounts beyond principal.
- The district court properly limited recovery to transfers within UFTA’s four-year period and properly calculated net profits subject to recovery.
- Kowell was not entitled to reduce liability by the amount of federal income taxes paid on the fictitious profits.

## Legal Principles

- Under UFTA, a transfer made with “actual intent to hinder, delay, or defraud” creditors is fraudulent and avoidable; in a Ponzi scheme, courts infer such intent for transfers made to further the scheme (the “Ponzi scheme presumption”).
- In Ponzi-scheme clawback actions, return of principal is treated as supported by value (satisfying the investor’s restitution claim), but payments exceeding principal are not supported by reasonably equivalent value and are avoidable.
- UFTA’s transferee protections for good faith are limited by the requirement that the transferee give value; good faith alone does not immunize receipt of fictitious profits.
- UFTA’s limitations period applies on a transfer-by-transfer basis; recovery is limited to transfers within the statutory window.
- UFTA does not authorize an offset for a transferee’s personal tax payments, and allowing such offsets would conflict with equitable, ratable distribution among defrauded investors.

## Conclusion

The Ninth Circuit held that a receiver may recover an innocent investor’s net profits from a Ponzi scheme as fraudulent transfers under California UFTA, that good faith does not supply reasonably equivalent value for fictitious profits, that recovery is limited to timely transfers, and that taxes paid on those profits do not reduce disgorgement liability.


Donell v. Kowell, 533 F.3d 762 (9th Cir. 2008)