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Redemption Payments Salvaged Prior to the Collapse of Ponzi Schemes
What can be worse than crushed expectations? Consider the following: An investor's money was invested with a hedge fund that turned out to be a Ponzi scheme. In a stroke of luck, the investor avoided a huge loss by redeeming his investment and gains prior to the collapse of the crooked company. Now, the trustee of the bankrupt hedge fund wants the money back, claiming that the transfer was fraudulent under ' 548 of the Bankruptcy Code and the N.Y. Fraudulent Conveyance law (New York Debtor & Creditor Law ” 271-276). Is there a quick way out of this nightmarish scenario? No, according to Bayou Superfund LLC v. WAM Long/Short Fund II. L.P. et al. (In re Bayou Group, LLC), 2007 WL 582530 (Bankr.S.D.N.Y.)
Bayou
Bayou operated as a hedge fund which turned out to be a massive Ponzi scheme that snared a large number of innocent investors. The two principals of Bayou siphoned many millions of dollars from the hedge fund for their personal benefit, disseminated false financial reports indicating phony investment gains when in fact Bayou had experienced substantial losses, created a phony accounting firm to certify those financial reports, and caused Bayou to make redemption payments to certain investors in inflated amounts derived from those false reports. Not surprisingly given those facts, the principals of Bayou pled guilty to several felony counts. Once the company came under bankruptcy protection, the appointed trustee sought to recover over $135 million in inflated redemption payments that occurred over a 14-month period prior to the bankruptcy filing. The trustee's complaint alleged that those transfers were purposefully made to conceal the fraud and induce further investors to place funds with Bayou. The complaint included counts of actual and constructive fraudulent conveyance under ' 548 of the Bankruptcy Code and the New York D&C Law ” 271-276.
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