Robert Kowell found an investment opportunity that sounded too good to be true. In Kowell’s case, it wasn’t. J.T. Wallen-brock & Associates (“Wallenbrock”) promised Kowell a 20 percent return on his investment every ninety days, risk free, and that is nearly what he got. Because he received regular interest payments from Wallenbrock, Kowell was quite surprised to learn later that an SEC investigation had revealed the business to be a Ponzi scheme in which thousands of investors had been defrauded. Several years after Kowell first invested, and long after he had spent his returns, he was informed by the receiver for Wallenbrock that California law requires him to pay back all of his gains. Kowell challenges a judgment requiring him, as an innocent investor, to disgorge his profits as fraudulent transfers under the Uniform Fraudulent Transfer Act. He also asks this court to permit him to offset any liability by amounts paid in federal income taxes on his earnings. The district court found that Kowell was liable to repay $26,396.10, plus pre-judgment interest of $5,159.22. We affirm.
*767 I
A
The Uniform Fraudulent Transfer Act (“UFTA”) as adopted by California states in relevant part:
(a) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor’s claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation as follows:
(1) With actual intent to hinder, delay, or defraud any creditor of the debtor.
(2) Without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor either:
(A) Was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction.
(B) Intended to incur, or believed or reasonably should have believed that he or she would incur, debts beyond his or her ability to pay as they became due.
Cal. Civ. Code § 3439.04(a). 1
Courts have routinely applied UFTA to allow receivers or trustees in bankruptcy to recover monies lost by Ponzi-scheme investors.
2
See, e.g., In re Agric. Research & Tech. Group,
B
Robert Kowell and his mother Edna were two of the thousands of investors in a Ponzi scheme operated by Wallenbrock.
See SEC v. J.T. Wallenbrock,
In January of 2002, the Securities and Exchange Commission (“SEC”) brought a civil enforcement action against Wallen-brock, alleging that it was engaged in a fraudulent scheme to sell unregistered securities. Id. at 535. Notwithstanding Wallenbrock’s characterization of the fraudulent investment instruments as “notes” (and therefore not “securities” within the meaning of the Securities Act), we held that the investment instruments were, for purposes of the SEC’s enforcement action, “securities.” Id. at 537. Wallenbrock was later placed in receivership and appellee James H. Donell (“the Receiver”) was appointed receiver.
On August 24, 2004, Kowell and his mother received a letter from Donell. The letter informed Kowell that Wallen-brock had been declared a Ponzi scheme, and that Donell had been authorized by a federal court to recover “profits” paid to investors. The letter stated that of approximately 6,000 investors, only 800 had received payments in excess of their principal investment. The letter claimed that Kowell had invested “the sum of $.00,” and had received back payments totaling $69,546.70. Thus, Kowell had allegedly received a “profit” of $69,546.70. The letter encouraged Kowell “[t]o take advantage of this one-time offer to settle with the Receivership estate for 90% of the profit you received” by mailing a check in the amount of $62,592.03 (calculated as 90 percent of $69,546.70). The letter also required Kowell to execute an enclosed Settlement Agreement. It stated in bold letters that “it is imperative that I hear from you within 20 days from the date of this letter,” or else “I will proceed accordingly.”
Kowell replied by letter on August 31, 2004. Kowell stated that he had no idea Wallenbrock was a Ponzi scheme, and was in fact dubious that this was the case. Kowell expressed confusion as to how he could be liable to other investors if he had no idea Wallenbrock was a fraud. Kowell was also confused about the determination that Wallenbrock “notes” were actually securities. Kowell pointed out that Donell’s letter claimed that Kowell’s initial investment was “0.00,” and that this must be error because Kowell had obviously made some non-zero investment in order to be eligible for returns from Wallenbrock. Finally, KowelFs letter stated that the money received in payments had been spent long ago, and if Kowell was required to pay back this amount, close to $70,000, he would have to declare bankruptcy.
Donell responded with a letter on September 22, 2004, which reiterated that Ko-well was liable. The letter stated that “[t]he law in this regard goes back years and years,” but notably did not cite any legal authority justifying Donell’s demands. The letter also threatened:
If you refuse to work out a settlement agreement with us, we will sue you and that will be your only option. It is not what we want for either you or your mother, however.... If you hire an attorney, you may. certainly file a motion to bar the Receiver from collecting money from those that profited. Both the Receiver and the SEC would file objections and it would probably take about $20,000.00 in legal fees for you to file such a motion.
Kowell refused to sign the settlement agreement. By a letter dated September 27, 2004, he reiterated his utter disbelief that Wallenbrock was in fact a Ponzi scheme and his outrage that a good-faith investor in a business could be required to return his profits years later.
The Receiver filed a complaint in federal district court on November 30, 2004. The *769 complaint sought to avoid the transfers to Kowell as fraudulent and to recover property transferred under Cal. Civ. Code §§ 3439.04(a)(l)-(2) and 3439.05. Retreating from his earlier position that Kowell was liable for $69,546.70, the Receiver now claimed he was entitled to recover $50,431.78. On motion for summary judgment, the district court found that there were no disputed issues of fact as to Ko-well’s liability under § 3439.04, and granted judgment for the Receiver. Applying the statute of limitations, the district court found that the receiver was only entitled to recover $26,396.10, the total of the payments to Kowell within the statutory period, plus pre judgment interest of $5,159.22. The district court made no ruling on whether Kowell would be permitted to offset his liability by the amount paid in taxes on those payments or other expenses. Ko-well timely appealed.
II
Although the Receiver only filed suit under a California statute, we have subject matter jurisdiction because this proceeding is ancillary to the SEC enforcement action. Wallenbrock was found liable to its investors and to the SEC under Sections 10(b) and 15(c)(1) of the Securities Exchange Act of 1934 (and related Rules 10b-5 and 15cl-2) and Sections 17(a)(1), (2), and (3) of the Securities Exchange Act of 1933. The district court, using its equity powers, appointed the Receiver to “use reasonable efforts to determine the nature, location, and value of all assets and property” belonging to Wallenbrock, “determine the identity of all investors, amounts invested by investors, and payouts to investors,” and “take such action as necessary” to identify, preserve, collect, or liquidate Wallenbrock’s assets. The district court authorized the Receiver to “bring such legal actions based on law or equity in any state or federal court as he deems necessary” to carry out his duties.
The federal securities laws create exclusive federal jurisdiction over “all suits in equity and actions at law brought to enforce any liability or duty created by” federal securities laws. 15 U.S.C. §§ 77v(a), 78aa. The federal district court properly authorized the Receiver to bring suits under state law in federal court under ancillary jurisdiction for the purpose of effectuating its decree of liability against Wallenbrock because the primary lawsuit against Wallenbrock presented a federal question.
See
28 U.S.C. § 1367; Fed.R.Civ.P. 66. As the Supreme Court stated in
Peacock v. Thomas,
“we have approved the exercise of ancillary jurisdiction over a broad range of supplementary proceedings involving third parties to assist in the protection and enforcement of federal judgments -including attachment, mandamus, garnishment, and the pre-judgment avoidance of fraudulent conveyances.”
We review a district court’s rulings on summary judgment motions
de novo. Agritech,
Ill
Where causes of action are brought under UFTA against Ponzi scheme investors, the general rule is that to the extent innocent investors have received payments in excess of the amounts of principal that they originally invested, those payments are avoidable as fraudulent transfers:
The money used for the [underlying investments] came from investors gulled by fraudulent representations. [The defendant] was one of those investors, and it may seem “only fair” that he should be entitled to the profits on trades made with his money. That would be true as between him and [the Ponzi scheme operator], It is not true as between him and either the creditors of or the other investors in the corporations. He should not be permitted to benefit from a fraud at their expense merely because he was not himself to blame for the fraud. All he is being asked to do is to return the net profits of his investment-the difference between what he put in at the beginning and what he had at the end.
Scholes,
Although we previously have not had occasion to prescribe an analysis for applying UFTA to allow recovery from investors in a Ponzi scheme, federal district and bankruptcy courts have adopted a largely uniform practice. In adopting this analysis, we first describe the theories of liability on which the receiver may proceed. We then describe a two-step process for determining the existence of liability and the amount of this liability.
A
There are two theories under which a receiver may proceed under UFTA: actual fraud or constructive fraud. Under § 3439.04(a)(1), codifying the “actual fraud” theory, the receiver alleges that the debtor (Ponzi scheme operator) made transfers to the transferee (the winning investor) “[w]ith actual intent to hinder, delay, or defraud” the creditors (the losing investors). “[T]he mere existence of a Ponzi scheme is sufficient to establish actual intent” to defraud.
In re AFI Holding,
In the context of a Ponzi scheme, whether the receiver seeks to recover from winning investors under the actual fraud or constructive fraud theories generally does not impact the amount of recovery from innocent investors. Under the actual fraud theory, the receiver may recover the entire amount paid to the winning investor,
including
amounts which could be considered “return of principal.” However, there is a “good faith” defense that permits an innocent winning investor to retain funds up to the amount of the initial outlay.
See
Cal. Civ. Code § 3439.08(a);
Scholes,
B
Drawing from this theory, federal courts have generally followed a two-step process. First, to determine whether the investor is liable, courts use the so-called “netting rule.”
See
Mark A. McDermott,
Ponzi Schemes and the Law of Fraudulent and Preferential Transfers,
72 Am. BaNKR. L.J. 157, 168-69 (1998) (surveying federal district court and bankruptcy cases). Amounts transferred by the Ponzi scheme perpetrator to the investor are netted against the initial amounts invested by that individual. If the net is positive, the receiver has established liability, and the court then determines the actual amount of liability, which may or may not be equal to the net gain, depending on factors such as whether transfers were made within the limitations period or whether the investor lacked good faith. If the net is negative, the good faith investor is not liable because payments received in amounts less than the initial investment, being payments against the good faith losing investor’s as-yet unsatisfied restitution claim against the Ponzi scheme perpetrator, are not avoidable within the meaning of UFTA.
4
See
Cal. Civ. Code § 3439.04(a)(2) (holding that only payments made “[w]ithout receiving a reasonably equivalent value” are avoidable as
*772
fraudulent transfers);
United Energy,
Second, to determine the actual amount of liability, the court permits good faith investors to retain payments up to the amount invested, and requires disgorgement of only the “profits” paid to them by the Ponzi scheme.
See In re Lake States Commodities, Inc.,
Although all payments of fictitious profits are avoidable as fraudulent transfers, the appropriate statute of limitations restricts the payments the Ponzi scheme investor may be required to disgorge. Only transfers made within the limitations period are avoidable.
Warfield v. Alaniz,
IV
A
The district court applied the analysis described above. The Receiver filed suit against Kowell under both § 3439.04(a)(1) (actual fraud) and § 3439.04(a)(2) (constructive fraud). The claim under § 3439.04(a)(1) alleged that “[t]he pay
*773
ments made to Kowell by Wallenbrock were made with the actual intent to hinder, delay or defraud Wallenbrock’s Note-holders,” now the “creditors of Wallen-brock.” The claim under § 3439.04(a)(2) alleged that “[t]he payments made to Ko-well in excess of Kowell’s Principal Investment were made without Kowell giving a reasonably equivalent value to Wallen-brock in exchange for the payments.” The district court did not indicate under which theory it granted summary judgment for the Receiver, although it cited “actual fraud” cases.
See In re Cohen,
The district court, to determine Kowell’s liability, netted the amount Kowell received from Wallenbrock against his initial investment, finding that Kowell invested $22,858.92 and received $73,290.70, for a net profit of $50,431.78. In the alternative, the court noted that Kowell had admitted in his own interrogatory answer that he paid taxes on approximately $50,000 in profits, which was sufficient to establish a net gain for purposes of proving liability under § 3439.04.
Kowell argues that the district court erred in admitting the declaration and report of Samuel Biggs, the Receiver’s accounting expert, to prove that Kowell netted $50,431.78, because the declaration and report lacked foundation. Kowell’s claim fails because the declaration satisfies the requirements for foundation and expert opinion. See Fed. R. Evm 703, 705. Samuel Biggs is a certified public accountant, and his declaration and report were based on accounting records held by Wells Fargo Bank and one of the scheme perpetrators. More importantly, any error in admitting the Biggs declaration would have been harmless, because Kowell admitted in his own interrogatory that he received approximately $50,000 in net profits. The netting rule is used not to determine the amount of liability but rather the existence of liability; it requires only a positive net transaction with the Ponzi scheme. Thus, Kowell’s admission that he netted $50,000 was sufficient to establish the existence of liability under § 3439.04.
The district court properly limited the Receiver’s recovery to amounts transferred to Kowell within the statutory period. California’s UFTA has its own associated statute of limitations. Cal. Civ. Code § 3439.09. An action under § 3439.04(a)(1), for actual fraud, must be brought “within four years after the transfer was made or the obligation was incurred or, if later, within one year after the transfer or obligation was or could reasonably have been discovered by the claimant.” Cal. Civ. Code § 3439.09(a). An action under § 3439.04(a)(2), for constructive fraud, must be brought within four years after the transfer was made. Cal. Civ. Code § 3439.09(b). The Receiver filed suit on November 30, 2004. The district court found Kowell liable only for payments received on December 20, 2000, June 19, 2001, and September 19, 2001, totaling $26,396.10. Thus, although Kowell actually netted $50,431.78 in total, the district court entered judgment. for $26,396.10, plus pre-judgment interest.
Kowell argues that the district court should have required the Receiver to trace the transfers and demonstrate whether the three payments within the statutory period were return of principal or profit. He *774 argues that if some of the transfers from within the statutory period were returns of the principal which Kowell invested before the statutory period, these transfers would also fall outside of the statute of limitations. Kowell’s proposed tracing requirement is unsupported by law and would be unmanageable in practice. We decline to require such tracing. As with the netting rule:
[T]he trustee need not match up each investment with each payment made by the debtor and follow the parties’ characterizations of the transfers. This may be the only workable rule in the typical Ponzi scheme case, where documentation of transfers is less than complete, payments are sporadic and not always in accordance with the documentation of the investment, and neither the investor nor the debtor can recall precisely what the parties intended.
Lake States,
B
Kowell offers several theories as to why we should not permit courts to require innocent investors to disgorge net profits from a Ponzi scheme under UFTA. We address each in turn.
1
First, Kowell argues that UFTA was never intended to apply to innocent investors in a Ponzi scheme. To support his argument, he challenges that the text of the statute covers transfers between “debtors” and “creditors,” not between early investors and later investors in the same enterprise. In the same vein, he argues that if all the investors in the scheme are “creditors” under UFTA, he should be considered a creditor as well, and not, as the receiver argues, a “transferee.” In other words, Kowell argues that application of UFTA in the wake of a Ponzi scheme seems to necessitate that all investors in the scheme be deemed “creditors” but only some are deemed “transferees,” but that nothing in the text of the statute dictates this result.
Kowell’s claim fails because the terms of the statute are abstract in order to protect defrauded creditors, no matter what form a Ponzi scheme or other financial fraud might take.
See Agritech,
In this case, we need not construe the terms particularly broadly in order to see that they apply quite clearly to Kowell. As we discussed above, when Kowell and the other innocent victims gave money to
*775
Wallenbrock, they were not actually investors, but rather tort creditors with a fraud claim for restitution equal to the amount they gave.
See United Energy,
2
Second, Kowell argues that the federal securities laws preempt UFTA, and therefore, because the Wallenbrock “notes” have been deemed securities, the Receiver may only sue him for securities fraud, not for restitution as the recipient of a fraudulent transfer. Federal preemption may be express or implied.
See Montalvo v. Spirit Airlines,
UFTA permits a receiver or trustee to further the purpose of many securities laws by providing recourse to defrauded debtors. 7 The fact that the initial perpe *776 trator may have been found guilty for securities fraud does not mandate that actions brought against other participants sound in securities fraud. The actions against participants like Kowell are brought to “enforce [a] liability or duty” created by the securities laws. 8
3
Third, Kowell argues that it is inequitable to apply UFTA to recover profits he received because he was an innocent victim of the Wallenbrock scheme, just like those whom UFTA purports to protect. We are aware that it may create a significant hardship when an innocent investor such as Kowell is informed that he must disgorge profits he earned innocently, often years after the money has been received and spent.
9
Nevertheless, courts have long held that is more equitable to attempt to distribute all recoverable assets among the defrauded investors who did not recover their initial investments rather than to allow the losses to rest where they fell.
See Scholes,
Moreover, pursuant to UFTA, the Receiver is only entitled to recovery of the amounts above Kowell’s initial investment transferred within the limitations period. Thus, the statute protects Kowell in two ways. It allows him to keep the full amount of his original investment,
see Scholes,
4
Fourth, Kowell argues that the Receiver does not have standing to bring this action against him. Ordinarily, he points out, a debtor does not have standing to avoid his own transactions. Similarly, he claims that the Receiver cannot represent the interests of all of the investors because Kowell himself is an investor as much as any other and yet his interests are adverse to those of the Receiver. The Seventh Circuit confronted similar arguments in
Scholes,
in which the defendants (winning investors) argued that the receiv
*777
er did not have standing to sue them because he was “really” suing on behalf of the losing investors, as opposed to the corporation.
Scholes held that, during the operation of the scheme, the corporations created by the scheme operator were “robotic tools” of the operator, but nonetheless separate legal entities in the eyes of the law that were forced (by the operator) to pay out funds to early investors instead of using the corporation’s funds for legitimate investments. Id. at 754. Once the scheme collapsed, “[t]he appointment of the receiver removed the wrongdoer from the scene. The corporations were no more [the operator’s] evil zombies. Freed from his spell they became entitled to the return of the moneys — for the benefit not of [the operator] but of innocent investors — that [the operator] had made the corporations divert to unauthorized purposes.” Id. We agree with the Seventh Circuit’s colorful analysis. The Receiver has standing to bring this suit because, although the losing investors will ultimately benefit from the asset recovery, the Receiver is in fact suing to redress injuries that Wallenbrock suffered when its managers caused Wal-lenbrock to commit waste and fraud.
5
Fifth, Kowell argues that even if UFTA applies to this case, he should not be found hable because his initial investment provided “reasonably equivalent value” in exchange for the profits he earned in the scheme. See Cal. Civ. Code § 3439.04(a)(2). Despite the intuitive appeal of Kowell’s argument, we reject it by considering the economic exchange in a Ponzi scheme.
UFTA identifies an avoidable transfer as one made “[w]ithout receiving a reasonably equivalent value in exchange.” Cal. Civ. Code § 3439.04(a)(2). Unlike contract law, which requires only that “adequate” consideration be given, UFTA requires that, to escape avoidance, a transfer have been made for “reasonably equivalent value.” The purpose is not to identify binding agreements, but to identify transfers made with no rational purpose except to avoid creditors.
See Scholes,
Payouts of “profits” made by Ponzi scheme operators are not payments of return on investment from an actual business venture. Rather, they are payments that deplete the assets of the scheme operator for the purpose of creating the appearance of a profitable business venture.
Id.
at 756-57. The appearance of a profitable business venture is used to convince early investors to “roll over” their investment instead of withdrawing it, and to convince new investors that the promised returns are guaranteed.
Cf. Agritech,
In this case, Kowell never actually possessed an interest in a company purchasing account receivables from Malaysian glove manufacturers. The investment strategy promised by Wallenbrock’s officers was a lie to induce Kowell and investors like him to fund Wallenbrock. What Wallenbrock did was return to Kowell his own money, plus money from subsequent “investors,” to persuade Kowell to continue to invest and to secure testimonial evidence from people like Kowell to induce others to invest. Although Kowell was putting real money into Wallenbrock, and was getting what looked like real profits in return, in fact he never received “reasonably equivalent value” for his investment, just cash that was moved around in an elaborate shell game.
V
Kowell argues that even if he is liable to return amounts in excess of his initial outlay, he should be permitted to offset this liability by amounts paid as income taxes on those gains, bank transfer fees, and other expenses. Kowell argues that unless these offsets are permitted, he will be forced to pay back more money than he actually netted from his participation in the scheme. He argues that UFTA should not be applied so as to aid other investors in recovering the full amount of their outlay by forcing Kowell to retain less than the full amount of his outlay. Kowell cites no authority to support his position. The cases cited by the Receiver, however, do not guide us to the contrary conclusion.
In
In
re
Tiger Petroleum Company,
the trustee attempted to classify certain “investors” who did not actually receive payments for amounts greater than their initial investments liable as net-gain investors under the netting rule through the novel argument that tax benefits those investors received due to participation in the scheme should be added into the calculation of their gains.
The Receiver also quotes
In re Acequia, Inc.
for the proposition that “[a] fraudulent conveyance cannot be offset against or exchanged for a general unsecured claim.”
Kowell’s argument does merit consideration. The purpose of UFTA is to permit the receiver to collect those assets that can actually be located and recovered in the wake of a Ponzi scheme, and to ratably distribute those assets among all participants, including the many investors who lost everything. UFTA accomplishes this by requiring good faith participants to disgorge their gains and permitting them keep the full amount of their initial investment.
See Scholes,
Nevertheless, three factors lead us to decline to permit good faith investors to claim offsets for taxes or other expenses paid in connection with receipt and management of income from a Ponzi scheme. First, as Kowell’s argument suggests, if we permit offsets for taxes, logic suggests we should also permit offsets for bank transfer fees and other fund management fees. There would also be no reason to prohibit offsets for the other countless expenses Kowell has incurred. There is simply no principle by which to limit such offsets; one could argue that every purchase made with the gains from the scheme would not have been made “but for” receipt of that money. If each net winner could shield his gains in their entirety in this manner, the purpose of UFTA would be defeated, and the multitude of victims who lost their entire investment would receive no recovery.
Second, even if we could limit permissible offsets to a few areas such as taxes paid, this would introduce complex problems of proof and tracing into each case. This would severely reduce the receiver’s ability to effectively gather what few assets can be located in the wake of a failed Ponzi scheme. In addition, were we to adopt a tax offset, the amount of the offset would depend on Kowell’s tax bracket. Thus, two Wallenbrock investors, having made identical payments and having received identical returns, might receive different tax offsets because of their other financial decisions. Third, we cannot discern the equity in permitting an offset here, when any taxpaid credit offered to Kowell must come at the expense of other Wallenbrock investors. The Internal Revenue Service is not a party to this suit, and the disappointed investors have no cause of action to recover those monies from the IRS.
We thus decline to start down a path we do not recognize. There is no basis in UFTA for Kowell’s offset. Accordingly, Kowell is not entitled in this action to offset his liability to the Receiver by the taxes (or other expenses) he paid on his Wallenbrock “profits.” If Kowell believes he overpaid his taxes for the years he received Wallenbrock “profits,” he may wish to pursue his remedies with the IRS.
VI
Ponzi schemes leave no true winners once the scheme collapses — even the winners were defrauded, because their returns were illusory. Those who receive gains from innocent participation in the scheme may be required to disgorge those amounts, long after the money has been spent. Addressing the victims of the original Ponzi scheme, the Supreme Court commented that “[i]t is a case the circumstances of which call strongly for the principle that equality is equity.”
Cunningham v. Brown,
California’s Uniform Fraudulent Transfer Act has treated Kowell fairly. Indeed, Kowell actually benefitted from the equitable concerns embodied in UFTA. Kowell “invested” $22,858.92 into the scheme; Wallenbrock made payments to Kowell (including the return of his initial “investment”) totaling $73,290.70. The Receiver’s original demand letter inaccurately informed Kowell that he owed $69,546.70, and tried to pressure him to mail a check for 90 percent of that amount, or $62,592.03, within 20 days or face consequences. Because Kowell did not succumb to these tactics and instead sought protection in federal court, the Receiver was forced to concede that Kowell netted only $50,431.78. Further, the applicable statute of limitations limited Kowell’s actual liability to $26,396.10, plus pre-judgment interest of $5,159.22, for a total liability of $31,555.32.
Thus, comparing the total he received, $73,290.70, with the amount he must return, $31,555.32, shows that Kowell will be permitted to retain $41,735.38 of the monies Wallenbrock paid him — for a net gain of $18,876.46 on his initial investment of $22,858.92 (calculated as $41,735.38 - $22,858.92). This represents a total return of approximately 83 percent on his investment, or, an annualized return, over the period of investment from 1997 to 2001, of approximately 16 percent. Most of the scheme’s 5,200 net losers are likely to recover only pennies on the dollar of their initial investment.
The judgment is AFFIRMED.
Notes
. Notwithstanding the quoted language above, all courts construing UFTA state that there is an "or” between subsections (a)(1) and (a)(2).
. A Ponzi scheme is a financial fraud that induces investment by promising extremely high, risk-free returns, usually in a short time period, from an allegedly legitimate business venture. "The fraud consists of funnelling proceeds received from new investors to previous investors in the guise of profits from the alleged business venture, thereby cultivating an illusion that a legitimate profit-making business opportunity exists and inducing further investment.”
In re United Energy Corp.,
. Similarly, because the parties do not dispute Kowell's good faith, we need not consider the precise definition of good faith.
Cf. Agritech,
. Under the actual fraud theory, the good faith losing investor is technically still liable even if his net transactions are negative, because even payments that total less than the amount of that investor’s initial outlay were made "[w]ith actual intent to hinder, delay, or defraud [a] creditor of the debtor.” Cal. Civ. Code § 3439.04(a)(1). However, because of the "good faith” defense, that permits an innocent investor to retain funds up to the amount of the initial outlay, Cal. Civ. Code § 3439.08(a), the good faith investor with a net loss will not face any actual liability.
. The application of the netting rule may be more complex in a case where the relationship between the investor and the Ponzi scheme perpetrator changes over time.
See, e.g., In re Lake States Commodities, Inc.,
. Kowell’s reliance on
Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson,
. Although in this case bankruptcy proceedings were not initiated, a common epilogue to a collapsed Ponzi scheme is a bankruptcy proceeding. Once in bankruptcy, federal law authorizes the trustee to bring suit under both applicable state law and also the fraudulent transfer provision of the bankruptcy code.
See
11 U.S.C. § 548 (the federal fraudulent transfer provision); 11 U.S.C. § 544(b) (authorizing the trustee to recover fraudulent transfers under § 548 and also applicable state law);
United Energy,
. For the same reasons, we reject Kowell's argument that the statute of limitations found in the securities laws applies to his case. The fact that Wallenbrock was found guilty of securities fraud, aside from supporting federal jurisdiction in this ancillary proceeding, has no bearing on the case. The Receiver brought suit under California Civil Code § 3439.04, and that statute expressly provides a limitations period. Cal. Civ. Code § 3439.09.
. The hardship visited on innocent investors who are later required to disgorge their profits has been widely reported as yet another common tragic result of a Ponzi scheme. See, e.g., E. Scott Reckard, You Won, Now Give it Back, L.A. Times, May 20, 2004, at Al.