The opinion of the court was delivered by: Diamond, J.
Ponzi schemes are pernicious because they masquerade as legitimate investments. In fact, only a very few early "investors" recover their principal and earn profit -- paid entirely from the monies provided by later "investors," who commonly lose everything. It appears that this is what happened to those who invested in the Partnership created by Defendant Joseph S. Forte. Forty-one early investors provided Forte with some $32 million in principal and recouped some $41 million as return of principal and profits, all paid by eighty-three later investors, who recouped nothing. On March 30, 2009, I granted the request of the Securities and Exchange Commission and the Commodity Futures Trading Commission to appoint a Receiver to determine, inter alia, what assets she could recover for redistribution to Mr. Forte's victims.
Counsel for the Receiver has submitted for my approval Consent Orders settling the Receiver's fraudulent conveyance claims brought against two of Forte's early investors under the Pennsylvania Uniform Fraudulent Transfer Act. See 12 Pa. C.S.A. § 5101 et seq. The Orders provide that both investors will repay some $220,000 in "net winnings," or profits from the Ponzi scheme, but none of the $765,000 principal they invested with Forte. Counsel for the Receiver explains that he intended to pursue both the principal and the profits as PUFTA allows, but was deterred when the SEC and CFTC stated that they would oppose any such action. Letter from Lawrence T. Hoyle, Jr. to the Honorable Paul S. Diamond, U.S. District Judge (December 2, 2009). Neither the SEC nor the CFTC has disclosed to me why it has taken this position. Counsel recommends that I approve these Consent Orders because litigating against the SEC and the CFTC would likely consume the principal amount he seeks to recover, and because these "icebreaker" settlements will benefit the Receivership Estate. Although the position of the SEC and the CFTC does not have clear legal support and denies Forte's victims a possible avenue of recovery, I will nonetheless reluctantly approve the Consent Orders.
A. The Government's Allegations
On January 7, 2009, the SEC and the CFTC filed related actions, charging that Forte and his Limited Partnership, Joseph Forte, L.P., had violated myriad securities laws through Forte's operation of a Ponzi scheme from 1995 to 2008. (No. 09-63, Doc. No. 1; No. 09-64, Doc. No. 1.) The agencies based their allegations largely on Forte's own admissions. See, e.g., No, 09-63, Doc. No. 1 ¶¶ 17, 22, 27. Forte fraudulently solicited and accepted more than $100 million through the sale of securities in the form of limited partnerships in Joseph Forte, L.P. (No. 09-63, Doc. No. 1 ¶ 1; No. 09-64, Doc. No. 1 ¶ 1.) Forte acted as an unregistered commodity pool operator for Forte, L.P., purportedly telling investors that the Limited Partnership would trade in futures contracts, including S&P 500 stock index futures. (No. 09-63, Doc. No. 1 ¶ 2; No. 09-64, Doc. No. 1 ¶ 2.)
Contrary to his representations, Forte invested only a fraction of the money in commodity futures. (No. 09-63, Doc. No. 1 ¶ 3.) Those investments were, apparently, less than successful.From 1995 through 2008, Forte nonetheless returned some $41 million in pool participant funds to his early investors. (Id. ¶ 3, 22.) Forte falsely represented that the pool was earning between 20% to over 36% in annual returns, and that as of September 2008, the pool had increased in value to more than $154 million. (Id. ¶ 4, 18, 24.) In fact, Forte paid himself and his early investors with monies provided by Forte L.P.'s later investors. (No. 09-64, Doc. No. 1 ¶ 4.)
On May 5, 2009, Forte was charged with wire fraud, mail fraud, bank fraud, and money laundering. (See United States v. Forte, Case No. 09-304, Doc. No. 13.) On November 24, 2009, after he pled guilty to all charges, Forte was sentenced to a term of fifteen years imprisonment. (Id., Doc. No. 35.)
On January 7, 2009, the SEC and the CFTC filed Emergency Motions for a Preliminary Injunction and an Order Freezing Assets, asking me to freeze "any funds or other assets presently held by [Joseph Forte or Forte, L.P.], under their control or over which they exercise actual or apparent investment or other authority, in whatever form such funds or other assets may presently exist and wherever located." (No. 09-63, Doc. No. 2 ¶ I; No. 09-64, Doc. No. 2 ¶¶ II-III.) The agencies sought to preserve any remaining funds for: (1) the equitable remedy of disgorgement; and (2) the payment of civil penalties. (No. 09-63, Doc. No. 1 at 8; Tr. Feb. 9, 2009 at 9-11.)
Forte, who chose to proceed pro se, did not dispute the agencies' allegations, and consented to the relief sought. (No. 09-63, Doc. Nos. 3-4; No. 09-64, Doc. No 3.) After conducting a hearing, I entered the preliminary injunction and asset freeze Orders. (No. 09-63, Doc. No. 5; No. 09-64, Doc. No. 4.) In February, I denied Forte's request to release funds with which he could pay his personal expenses. (No. 09-63, Doc. No. 21; No. 09-64, Doc. No. 18.) On September 30, 2009, Forte consented to a permanent injunction and asset freeze. (No. 09-63, Doc. No. 34; No. 09-64, Doc. No. 32.)
On March 17, 2009, the SEC and the CFTC filed an unopposed Motion to appoint a joint Receiver and Counsel to preserve, protect, and assume control of the assets of Defendants Forte, L.P. and Joseph S. Forte and to maximize any possible recovery to the defrauded investors. (No. 09-63, Doc. No. 22; No. 09-64, Doc. No. 21.) At the SEC's request, I appointed as Receiver Marion A. Hecht, Managing Director of the Forensic Litigation and Valuation Division of Goodman & Company, L.L.P. (No. 09-63, Doc. No. 26 ¶ II; No. 09-64, Doc. No. 24 ¶ II.) My Order provided that the Receiver was authorized to retain Lawrence T. Hoyle, Jr. and the Hoyle Law Firm to serve as Counsel. Id. Paragraph X.P of the Order requires that before the Receiver initiates any action against Forte's limited partners, she must consult with the SEC and the CFTC. Id. ¶ X.P.
On August 27, 2009, the Receiver submitted her first Report summarizing the steps she had taken to assume control of the Receivership Assets. (No. 09-63, Doc. No. 33; No. 09-64, Doc. No. 31.) The Receiver stated that from a total of 124 investors, eighty-three lost all the money they had given to Forte -- approximately $34 million. The Receiver also noted that forty-one investors were "net winners" who collectively received $8,563,928 more ...