Recently I’ve added Ponzi Tracker to my RSS reader and it’s fun in that way that we all enjoy things that feed our confirmation bias. And who doesn’t love a story about a criminal. Today’s post included this bit:
“… the court-appointed Receiver, Kenneth D. Bell, begins his quest to recover “false profits” from thousands of victims that were fortunate enough to profit from their investment. The receiver’s efforts to recover these “false profits” will become markedly easier in the event that Burks pleads guilty to the fraud, since the guilty plea or conviction of a Ponzi schemer allow the use of the “Ponzi presumption” that significantly simplifies the burden of proof required in the so-called “clawback” actions.”
I didn’t know that. It seems like a big gaping hole in the investor protections that encourage corporate risk taking. The reason we have limits on investor liability is that it lets the investors delegate risk taking to the corporation while avoiding the worst case scenarios that they will be held responsible for the evil that firm does. Their risk is limited to the amount of their investment. Back in the day only the king had the power to get away with murder, but then it devolved to his friends.
So I’d love to know why Ponzi schemes are unique in this regard. And I’d love to know that if we convicted a few large financial firms of just the right crimes we could then claw back the money from the “lucky” ones who cashed out early.
Any amateur social scientist knows the next question: What about incentives? If you threaten investor class it creates an incentive. Presumably the kings friends let this loophole appear because the victims of Ponzi schemes are somehow unique when compare to the other victims of corporate malfeasance. Maybe it’s about affinity. Which is ironic, as affinity is a common feature of Ponzi schemes, but in this case I think it might be that the Ponzi victims are called “investors.”
If only the victims of the mortgage crisis had called themselves investors. If only we could learn use that phrase “false profits” more.