The opinion of the court was delivered by: Diamond, J.
In this "Ponzi scheme" litigation, the Receiver supervising the recovery of assets on behalf of defrauded investors has submitted for my approval a Consent Order settling her potential claims against two "winning" investors. Because the Receiver has not had the opportunity to conduct an adequate individualized investigation as to whether the winning investors acted in good faith, I will disapprove the proposed Order without prejudice.
A. The Government's Allegations
On January 7, 2009, the Securities and Exchange Commission and the Commodity Futures Trading Commission filed related actions, charging Defendant Joseph S. Forte and his Limited Partnership, Joseph Forte, L.P., with violating myriad securities laws through Forte's operation of a Ponzi scheme from 1995 to 2008. See No. 09-63, Doc. No. 1; No. 09-64, Doc. No. 1; Cunningham v. Brown, 265 U.S. 1, 13 (1924). The agencies based their allegations largely on Forte's admissions and related investment documents. See, e.g., No. 09-63, Doc. No. 1 ¶¶ 17, 22, 27. It now appears that Forte fraudulently solicited and accepted original cash investments of $78.6 million from 125 investors through the sale of securities in the form of limited partnerships. Forte falsely represented that the investments were earning annual returns of 18% to over 38%, and that as of September 2008, the investments 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.) Of the 125 investors, forty-one were "net winners" who recovered their full $22.2 million principal payments as well as $8.6 million in "profits." See No. 09-63, Doc. No. 49, Ex. 2. Eighty-four investors lost a total of $34.8 million from their original investments of $56.4 million. Id.
On November 24, 2009, after he pled guilty to wire fraud, mail fraud, bank fraud, and money laundering charges, Forte was sentenced to a term of fifteen years imprisonment. See United States v. Forte, Case No. 09-304, Doc. No. 35.
On January 7, 2009, the SEC and the CFTC sought emergency injunctive relief, asking me, inter alia, 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.) Forte did not dispute the agencies' allegations, and, on September 30, 2009, consented to a permanent injunction and asset freeze. (No. 09-63, Doc. No. 34; No. 09-64, Doc. No. 32.)
On March 17, 2009, I granted the agencies' unopposed Motion to appoint Marion A. Hecht as Receiver of the Limited Partnership Estate. (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. to serve as Counsel. (Id.) The Order requires that before the Receiver initiates any litigation against Forte's limited partners, she must consult with the agencies. (Id. ¶ X.P.) If the SEC or CFTC objects to any such action, the Receiver must seek leave of Court to file her complaint under seal. The agencies will then have five days to present their objections -- also filed under seal -- to the Court. (Id.)
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 demanded that Forte's "net winners" return to the Receivership Estate their $8.6 million in false profits. (Id.)
On December 3, 2009, Mr. Hoyle submitted for my approval two proposed Consent Orders that would settle the Receiver's claims brought under the Pennsylvania Uniform Fraudulent Transfer Act against two of Forte L.P.'s early investors: Allen L. Greenough and F. Gibbs LaMotte. See No. 09-63, Doc. Nos. 38, 39; No. 09-64, Doc. Nos. 36, 37;12 Pa. C.S.A. § 5101 et seq. Mr. Greenough invested $335,000 in Forte L.P. between 1997 and 2003, and, by 2008, had received "profits" of $95,466 (in addition to the return of his principal). (Id.) Mr. LaMotte invested $430,000 between 2001 and 2008, and earned the return of that principal as well as $122,424 in "profits." (Id.) The Consent Orders provided that the Receiver would not seek to recover Greenough or LaMotte's principal investments unless she learned any facts casting doubt on either man's good faith. (Id.)
In a letter accompanying the proposed Consent Orders, Mr. Hoyle explained that the Receiver's decision to collect these net winnings, but not the principal, was the result of a disagreement with the SEC. See Doc. No. 36 (Letter from Lawrence T. Hoyle, Jr. to the Court (December 2, 2009)). Under PUFTA, Greenough and LaMotte could be required to return their principal investments to the Estate if it were shown that when investing in Forte L.P., they should have seen "red flags" that the Partnership was "too good to be true." According to Mr. Hoyle, the SEC took the far more restrictive view that "claims for principal should be asserted only against limited partners as to whom there is individualized evidence" that they were aware of the true nature of the Limited Partnership. Id. at 4.
Mr. Hoyle explained that "the Receiver originally contemplated, as PUFTA provides, filing suit to recover the entire fraudulent transfer from all Limited Partner net winners" - both the profits and the principal. Id. at 3. The SEC informed the Receiver that should she "file any such suits, [the agencies] will litigate the issue before this Court and, if necessary, before the Third Circuit." Id. at 4.
Because Mr. Hoyle feared that the cost of such litigation might exceed the principal the Receiver could recover, he recommended that I approve these "ice breaker" settlements. I reluctantly accepted his recommendation, explaining in a December 15, 2009 Memorandum that the SEC's position did not have clear legal support and denied Forte's victims a possible avenue of recovery. (Case No. 09-63, Doc. No. 37; Case No. 09-64, Doc. No. 35.) I noted that I might not approve a similar ...