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Hecht v. Malvern Preparatory School

May 26, 2010


The opinion of the court was delivered by: Diamond, J.


The Receiver supervising the recovery of assets on behalf of investors defrauded by "Ponzi" scheme operator Joseph S. Forte has filed suit against Malvern Preparatory School, seeking to recover proceeds from the scheme allegedly given to the School as "gifts." Malvern has moved to dismiss the Receiver's Complaint. For the reasons that follow, I will deny Malvern's Motion.

I. Background

A. The Government's Allegations

On January 7, 2009, the Securities and Exchange Commission and the Commodity Futures Trading Commission filed related actions, charging Joseph S. Forte and his Limited Partnership, Joseph Forte, L.P., with violating numerous securities laws through Forte's operation of a Ponzi scheme from 1995 to 2008. See SEC v. Forte, Civil No. 09-63, Doc. No. 1; CFTC v. Forte, Civil No. 09-64, Doc. No. 1; see alsoCunningham v. Brown, 265 U.S. 1, 13 (1924). The agencies based their allegations largely on Forte's admissions and related documents. See, e.g., Civil 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 the L.P.'s later investors. Civil 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 Civil 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, Criminal No. 09-304, Doc. No. 35.

B. Procedural History

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." Civil 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. Civil No. 09-63, Doc. No. 34; Civil No. 09-64, Doc. No. 32.

On March 30, 2009, I granted the agencies' unopposed Motion to appoint Marion A. Hecht as Receiver of the Limited Partnership Estate, and authorized Ms. Hecht to retain Lawrence T. Hoyle, Jr. as Counsel. Civil No. 09-63, Doc. No. 26, ¶ II; Civil No. 09-64, Doc. No. 24, ¶ II. The Receiver submitted two Reports (on August 27, 2009 and March 1, 2010), summarizing the steps she has taken to assume control of the Partnership assets.According to her Second Report, the Receiver has collected $359,616 from the sale of the Fortes' household items, the return of some of Forte's charitable donations, and the like. Civil No. 09-63, Doc. No. 49, Ex. 1; Civil No. 09-64, Doc. No. 47, Ex. 1. She has also collected from five limited partners some $547,383 in "net winnings," for a total recovery of $985,103.

C. The Receiver's Complaint and Malvern's Motion to Dismiss

On March 29, 2010, the Receiver filed the instant action -- one of seven Ms. Hecht brought against individuals and entities alleged to have received misappropriated Partnership assets. See Hecht v. Irwin, Civil No. 10-1371; Hecht v. Abraham Lincoln Found. of the Union League of Phila., Civil No. 10-1372; Hecht v. Skee Ball Profit Sharing Plan Participants, Civil No. 10-1373; Hecht v. Forte, Civil No. 10-1375; Hecht v. Crawford, Wilson, & Ryan Profit Sharing Plan Participants, Civil No. 10-1376; Hecht v. Investors Nos. 1102 & 1119, Civil No. 10-1377. The Receiver alleges that Malvern Prep received [more than $900,000 in] misappropriated Partnership assets from [Joseph] Forte as purported charitable donations, and . . . also received [more than $200,000 in] Partnership assets from one or more limited partners of the Partnership, including the Thornton D. & Elizabeth S. Hooper Foundation.

Malvern Prep has refused the Receiver's request to return the misappropriated funds and other assets that it received from Forte and/or others.

(Doc. No. 1 ¶ 1.) Seeking to recover these gifts "for the benefit of [the Partnership's] innocent investors," the Receiver brings three state law claims against Malvern: the first two under the Pennsylvania Uniform Fraudulent Transfer Act, 12 Pa. C.S. §§ 5101 et seq.,and the third for common law unjust enrichment. (Id.)

Under PUFTA's "actual fraud" provision, transfers by Ponzi scheme operators are fraudulent if made "with actual intent to hinder, delay or defraud" investors. 12 Pa. C.S. § 5104(a)(1). Alleging that Forte transferred more than $900,000 in Partnership assets to Malvern "with the actual intent to defraud," the Receiver seeks to recover these assets under PUFTA § 5107. (Doc. No. 1 ¶ 40.) See 12 Pa. C.S. § 5107(a)(1) ("In an action for relief against a transfer or obligation under this chapter, a creditor . . . may obtain . . . [a]voidance of the transfer or obligation to the extent necessary to satisfy the creditor's claim."). Similarly, the Receiver seeks to recover more than $200,000 in Partnership assets transferred to Malvern Prep by the Hooper Foundation -- a limited partner whose investments in the Partnership exceeded $16 million --alleging that Forte initially transferred these assets to the Foundation with "actual intent to hinder, delay, or defraud the Partnership's [investors]." (Doc. No. 1 ¶ 47.) Finally, the Receiver brings a claim for unjust enrichment, asserting that "it would be inequitable to permit Malvern Prep to retain the benefit of . . . purported charitable contributions [that] were the product of a Ponzi scheme and were composed solely of monies paid into the Ponzi scheme by limited partners of the Partnership." (Id. ¶ 57.)

Malvern has moved to dismiss, arguing that: (1) the Receiver's PUFTA claims are time-barred; (2) these claims lack particularity as required by Rule 9(b); (3) the Complaint provides the Hooper Foundation -- and by extension, Malvern Prep -- with an affirmative defense to the Receiver's second PUFTA claim; (4) the Receiver lacks standing to bring that claim; and (5) the Receiver has failed to allege whether the Partnership received what it expected in exchange for its charitable contributions to Malvern Prep, "a critical element in the assertion ...

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