                              In the

United States Court of Appeals
               For the Seventh Circuit

No. 12-1285

S ECURITIES AND E XCHANGE C OMMISSION,
                                                               Plaintiff,
                                  v.

W ILLIAM A. H UBER and H UBADEX, INC.,
                                                            Defendants.

A PPEAL OF:
    R ICHARD M EREL et al.


K EVIN B. D UFF, Receiver,

                                                               Appellee.



             Appeal from the United States District Court
        for the Northern District of Illinois, Eastern Division.
               Nos. 09 C 6068—Ruben Castillo, Judge.



  A RGUED S EPTEMBER 5, 2012—D ECIDED N OVEMBER 29, 2012




  Before P OSNER, K ANNE, and SYKES, Circuit Judges.
  P OSNER, Circuit Judge. William Huber operated a Ponzi
scheme in which 118 investors lost a total of $22.6 million.
2                                             No. 12-1285

He had told his investors—mainly friends and acquain-
tances, who trusted him—that he administered three
investment funds, using a computer trading model. He
had started the funds in 1996 but by 1998 or 1999 had
converted them (secretly of course) to a Ponzi scheme
in order to cover losses that the funds had incurred.
Eventually his fraud was discovered. He was prosecuted,
pleaded guilty to mail fraud and related crimes, and was
sentenced to 20 years in prison. See United States v.
Huber, 455 Fed. Appx. 696, 697 (7th Cir. 2012); Tony Reid,
“Forsyth Man Accused of Ponzi Scam That Swindled
Local Residents Out of Millions,” Herald & Review, Oct. 1,
2009, http://herald-review.com/article_82e2ee7f-d215-5d17-
b64e-ae275a4bbb0f.html (visited Nov. 5, 2012). A receiver
appointed to marshal and distribute the assets remaining
in Huber’s funds was able to get his hands on some
$7 million, or roughly 24 percent of the total amount of
money that had been invested in the funds ($7 million ÷
[$22.6 million + $7 million]) and has thus far distributed
all but about $1 million to the 118 investors. This appeal
concerns the $1 million balance remaining to be distrib-
uted.
  Instead of distributing the recovered assets pro rata
among the investors, the receiver made a distinction
among investors that eleven of them, the appellants, are
challenging. They had withdrawn portions of their in-
vestment from Huber’s funds before the scheme was
exposed. With the approval of the district court the re-
ceiver counted the withdrawals as partial compensa-
tion for these investors’ losses. In doing so he was
using what is called the “rising tide” method of al-
No. 12-1285                                             3

locating assets held by a receiver for distribution to
creditors; the appellants argue that he should have
used the “net loss” method (sometimes called the “net
investment” method) instead.
  To understand the difference between the two methods,
imagine that three investors lose money in a Ponzi
scheme. A invested $150,000 and withdrew $60,000 before
the scheme collapsed, so his net loss was $90,000. B in-
vested $150,000 but withdrew only $30,000; his net
loss was $120,000. C invested $150,000 and withdrew
nothing, so lost $150,000. Suppose the receiver gets hold
of $60,000 in assets of the Ponzi scheme—one-sixth of
the total loss of $360,000 incurred by the three investors
($90,000 + $120,000 + $150,000). We’ll call these recov-
ered assets “receivership assets.” Under the net loss
method each investor would receive a sixth of his loss, so
A would receive $15,000, B $20,000, and C $25,000, as
shown in the following chart; the pale blocks are the
amounts received by the investors and the dark blocks
are the withdrawals.
4                                              No. 12-1285




  Under the rising tide method, withdrawals are consid-
ered part of the distribution received by an investor and
so are subtracted from the amount of the receivership
assets to which he would be entitled had there been no
withdrawals. (When there are no withdrawals, rising tide
yields the same distribution of receivership assets as net
loss.) In our example, the total of withdrawn plus re-
ceivership assets is $150,000 ($60,000 + $30,000 + $0 [the
withdrawals] + $60,000 [the receivership assets]), but
there is only the $60,000 in such assets to distribute. A,
having been deemed (as a consequence of the rising tide
approach) to have “recovered” $60,000 before the col-
lapse of the Ponzi scheme, is entitled to nothing from
the receiver, as otherwise the remaining sum of with-
drawals and receivership assets—a total of $90,000
($30,000 in withdrawals, all by B, and $60,000 in receiver-
ship assets)—would be insufficient to bring the remaining
No. 12-1285                                               5

investors up to anywhere near A’s level. For remember
that under the net loss method each investor would
have received the same fraction of receivership assets as
his fraction of the loss, and thus A would have received
$15,000, B $20,000, and C $25,000. The result, since
under the rising tide method withdrawals are treated as
compensation, is that A would have been “compensated”
to the tune of $75,000 ($60,000 withdrawn + $15,000
in receiver assets), B $50,000 ($30,000 + $20,000), and C
$25,000 (the balance of receiver assets, C having had
no withdrawals).
  For the “tide” to raise B and C as close to A as possible,
B has to receive $15,000 in receiver assets, for a total
“recovery” of $45,000, and C the remaining receiver assets,
giving him $45,000 too. The division of withdrawals
plus receiver assets is then 60-45-45, as shown in the
next chart, versus 75-50-25 under the net loss method.
6                                             No. 12-1285




A and B, the withdrawers, are thus disadvantaged in the
litigation by the rising tide method compared to the
net loss method; they correspond to the eleven appellants.
C, the non-withdrawer, is advantaged; he corresponds
to the investors in Huber’s scheme who had made no
withdrawals.
  Rising tide appears to be the method most commonly
used (and judicially approved) for apportioning receiver-
ship assets. See, e.g., In re Receiver, No. 3:10-3141-MBS,
2011 WL 2601849, at *2, *4 (D.S.C. July 1, 2011); CFTC v.
Lake Shore Asset Management Ltd., No. 07 C 3598, 2010
WL 960362, at *7-10 (N.D. Ill. March 15, 2010); CFTC v.
Equity Financial Group, LLC, No. Civ. 04-1512 RBK AMD,
2005 WL 2143975, at *24-25 (D.N.J. Sept. 2, 2005); United
States v. Cabe, 311 F. Supp. 2d 501, 509-11 (D.S.C. 2003);
CFTC v. Hoffberg, No. 93 C 3106, 1993 WL 441984, at *2-3
No. 12-1285                                              7

(N.D. Ill. Oct. 28, 1993). But the net loss method is some-
times used instead. See SEC v. Byers, 637 F. Supp. 2d 166,
182 (S.D.N.Y. 2009); CFTC v. Barki, LLC, No. 3:09 CV 106-
MU, 2009 WL 3839389, at *2 (W.D.N.C. Nov. 12, 2009);
SEC v. AmeriFirst Funding, Inc., No. 3:07-cv-1188-D, 2008
WL 919546, at *6 (N.D. Tex. March 13, 2008); CFTC v.
Franklin, 652 F. Supp. 163, 169-70 (W.D. Va. 1986); see
generally Kathy Bazoian Phelps, “Handling Claims in
Ponzi Scheme Bankruptcy and Receivership Cases,” 42
Golden Gate U. L. Rev. 567, 572-77 (2012).
  Our appellants argue against rising tide on the ground
that they shouldn’t be penalized for having withdrawn
some of “their” money. But it was not their money; they
withdrew portions of the commingled assets in the
Ponzi schemer’s funds. Those were stolen moneys, albeit
stolen in part from the eleven appellants. An investor
has no entitlement to money stolen from other people.
When investors’ funds are commingled, none being
traceable to a particular investor, no part of whatever
funds are recovered is property of any investor. Instead
each investor is a creditor, and has merely a claim to
a share of the funds that is appropriate in light of the
relative size of his investment and other relevant
circumstancea. Those circumstances can include with-
drawals, which give credibility to a Ponzi scheme by
demonstrating that it has assets—although withdrawals
also may cause the scheme to run out of assets sooner
and therefore collapse before additional investments
are sucked into the whirlpool.
  But while the rising tide method discourages partial
exit in the form of withdrawals because withdrawers are
8                                             No. 12-1285

denied any further recovery, it also encourages a
withdrawer to withdraw his entire investment, since he
won’t be treated as well in the distribution of receiver
assets if it turns out that he invested in a Ponzi scheme.
Which method of allocation makes the scheme likely
to collapse earlier is therefore unclear, and the public
interest in the swift collapse of such schemes (see Saul
Levmore, “Rethinking Ponzi-Scheme Remedies in and out
of Bankruptcy,” 92 B.U. L. Rev. 969 (2012)) therefore
does not support one method over the other even when
withdrawals are driven by suspicions about the scheme’s
legitimacy rather than by chance.
  Investors who have made withdrawals will tend to
be better off when the Ponzi scheme collapses than inves-
tors who have made no withdrawals because the former
lose less than they would have lost had they not drawn
down their investment. But if they have spent the money
they withdrew, they may find themselves with all or
most of their savings still in the Ponzi scheme. Such
investors would tend to place a high marginal utility on
whatever receivership assets they received, yet under
rising tide would receive less than under net loss, and
maybe nothing. The net loss approach is particularly
attractive, therefore, when under rising tide a large num-
ber of investors—45 percent in SEC v. Byers, supra, 637
F. Supp. 2d at 182, and 55 percent in CFTC v. Barki, LLC,
supra, 2009 WL 3839389, at *2, two cases in which net loss
was used to allocate receivership assets in preference to
rising tide—would receive nothing. The more investors
in a Ponzi scheme there are who would receive nothing
No. 12-1285                                              9

under rising tide and might therefore have difficulty
paying their future expenses, the more likely the net loss
method is to maximize the overall utility of the inves-
tors. But only 18 percent of the investors in Huber’s
scheme receive nothing under rising tide, and so in this
case that method is an acceptable alternative to net loss.
  We are given pause, however, by the situation of an
investor who having withdrawn some money from the
Ponzi scheme then reinvests it. Suppose he had initially
invested $150,000 and then, shortly after withdrawing
$50,000, he reinvested it, thus restoring his balance to
$150,000, all of which he lost when the scheme collapsed.
Under the rising tide method he would be credited with
having invested $200,000 ($150,000 plus $50,000) and
having recouped a quarter of that amount by his with-
drawal, and thus would receive a reduced share of recov-
ered assets compared to a person who had invested
$150,000 and lost it without any interim withdrawals. We
can’t see why those two investors should be treated
differently, as would be obvious if the withdrawal and
reinvestment had occurred on successive days. In cases of
withdrawal followed by reinvestment, the investor’s
maximum balance in the Ponzi scheme ($150,000 in our
example) should be treated as his investment; the with-
drawals, having in effect been rescinded, should be
ignored.
  Or so it seems to us; we can’t find any discussion in
case law or commentary of this “maximum balance”
approach. We needn’t pursue the issue. Although one
of the appellants told the district court that he had with-
10                                            No. 12-1285

drawn money and reinvested it continually, he has
given no details and neither he nor any of the other
appellants ask us to adopt the maximum-balance ap-
proach that we have just described.
  There is a final oddity to note: Ponzi schemes often end
in bankruptcy court; the net loss rule applies in bank-
ruptcy, 11 U.S.C. § 726(b); and although withdrawals
made by investors who knew or should have known of
the fraud could be clawed back as fraudulent con-
veyances in bankruptcy, just as they could be in a re-
ceivership, Jobin v. McKay, 84 F.3d 1330, 1338-39 (10th
Cir. 1996) (bankruptcy); Scholes v. Lehmann, 56 F.3d 750,
759 (7th Cir. 1995) (receivership), there is no suggestion
that the appellants in our case knew or should have
known that Huber was a Ponzi schemer. So their with-
drawals could not be clawed back in bankruptcy and
therefore they might be better off were Huber’s fund in
bankruptcy. Whether they would actually be better off
would depend on their receiving a sufficiently larger
distribution from use of the net loss method to
compensate them for the time (and hence lower present
value of any recovery) and expense of a bankruptcy
proceeding. See id. at 755. That will rarely be the case
when the investors’ individual claims are modest, though
we note that a Ponzi scheme might be petitioned into
bankruptcy (governed by special rules) by the Securities
Investor Protection Corporation if the operator of the
scheme was a broker-dealer who was registered with
the SEC and had claimed to buy publicly traded securities
on behalf of individual investors. See In re Bernard L.
No. 12-1285                                             11

Madoff Investment Securities LLC, 654 F.3d 229, 232-33
(2d Cir. 2011). But Huber’s investors owned shares in
his funds, not in particular stocks.
  Even if the Ponzi scheme is pushed into bankruptcy, the
bankruptcy court, if it thinks rising tide superior to net
loss in the circumstances, can allow a previously ap-
pointed SEC receiver to control the receivership assets. 11
U.S.C. § 543(d). There is even authority for allowing a
district court, at the behest of the SEC when it is a party
to a suit (and the SEC is the plaintiff in this case,
though not involved in the appeal), to enjoin investors
and other creditors from filing a bankruptcy action if
that would interfere with the SEC’s pursuit of equitable
remedies (and a receivership is equitable). See 15 U.S.C.
§§ 77t(b), 78u(d)(5). “There is no unwaivable right to file
an involuntary bankruptcy petition, and, even if there
were, the receivership accomplishes what a bankruptcy
would. The receivership protects the assets of the
estate, just as a stay would in bankruptcy.” SEC v. Byers,
609 F.3d 87, 92 (2d Cir. 2010). Although Gilchrist v.
General Electric Capital Corp., 262 F.3d 295, 303-04 (4th
Cir. 2001), may seem contrary, it is distinguishable
because it involved a receivership under state law (the
case was in federal court under the diversity jurisdic-
tion) rather than federal securities law and a corporation
that the court thought too big to be wound up effectively
in a receivership. But we needn’t pursue the issue of
bankruptcy versus receivership; it’s too late for a bank-
ruptcy proceeding in this case.
  The cases treat the receiver’s choice among allocation
schemes as one within the discretion of the district court
12                                              No. 12-1285

to approve or disapprove, like other aspects of the ad-
ministration of a receivership. SEC v. Wealth Management
LLC, 628 F.3d 323, 332-33 (7th Cir. 2010); SEC v. Forex Asset
Management LLC, 242 F.3d 325, 331 (5th Cir. 2001); Grant
Christensen, “Allocating Loss in Securities Fraud: Time
to Adopt a Uniform Rule for the Special Case of Ponzi
Schemes,” 3 William & Mary Business L. Rev. 309, 319 (2012).
The appellants have not shown that the district court
abused its discretion, or indeed committed an error of
any magnitude, in approving the use of the rising tide
method to allocate compensation for losses caused inves-
tors by Huber’s fraud.
                                                  A FFIRMED.




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