One of the major issues an investor, who happens to be a victim of a ponzi scheme faces, is what is the proper measure of recovery, if any recovery is available. One school of thought is that the victim should receive the value of the investment as they believed it to be at the time the fraud is uncovered; this method frequently based upon information contained in fraudulent account statements. The other school of thought is net equity; or, the value of the investment, minus money the investor received in return from the scheme over time. This method is derived from the books and records of the scheme.
On its face, the first method would allow victims to profit from a fraud. Yes, they are victims, but should they profit. Most commentators, the Madoff Trustee and the SEC all think that the answer to that question is no. Now, the United States Supreme Court may have input on the viability of that position.
There is currently an appeal pending, but not yet accepted, to the Supreme Court to challenge the Second Circuit Court of Appeals’ ruling that upheld the Trustee’s net equity method to calculate what a ponzi scheme victim should be allowed to recover. The SEC has recently filed brief with the Court asking it not to take the appeal, but to leave the Second Circuit’s opinion stand.
Although this issue will remain uncertain until the Supreme Court takes some action, either accepting or denying the appeal, the long-term answer should be one based upon the equities. Victims need an avenue to recover, but they should not profit from a fraud, just like the fraudster should not have profited from the victims. Net equity return would appear to be the fairest methodology to all concerned. Now it is up to the Supreme Court to decide.