The idea of being implicated in fraud outrages 85-year-old James Richards, a semiretired veterinarian who says he hasn’t had so much as a traffic ticket since high school.

But that’s where he finds himself, implicated in the massive fraud perpetrated by former real-estate executive and now-convicted felon Doug Vaughan. The implication comes in a clawback lawsuit filed against him by Judith Wagner, trustee in the ongoing Vaughan Company Realtors bankruptcy case.

“They say I should have known I was dealing with a Ponzi scheme, that I went ahead and invested anyway,” he told the Journal. “That made me complicit with Vaughan.”

Richards said he had no idea Vaughan was up to anything illegal, a status likely shared with most of the 600 investors who gave a total of about $75 million to Vaughan. They thought their money was being used for real-estate investments, but Vaughan’s investment program turned out to be a Ponzi scheme.

When the scheme collapsed once and for all in February 2010, Vaughan and his flagship real-estate brokerage filed for bankruptcy court protection. The $75 million was gone.

VAUGHAN: Ran real-estate Ponzi scheme

VAUGHAN: Ran real-estate Ponzi scheme

As is typical in bankruptcies involving fraud, clawbacks were filed to recover or claw back certain types of payments made by Vaughan prior to the bankruptcy filing. The clawbacks came as a shock to most targeted investors, many of whom are middle-class retirees who rarely if ever have been in court.

“(Wagner) was supposed to protect us. If Vaughan had any assets, she was supposed to distribute them to us,” Richards said. “She’s turned 180 degrees and is victimizing us.”

The shock turned to outrage and, in the case of one couple, an unsuccessful attempt was made to countersue Wagner for “extortion, incompetence and fraud.”

Although they are civil lawsuits, clawbacks are designated a “complaint” and read like criminal indictments. The ones in the Vaughan Company Realtors case have multiple counts using the term “fraudulent transfers.” Perhaps the biggest blow contained in the clawbacks is the cash they seek to recover.

The clawback filed against Richards seeks $162,675 in “net winnings,” or the alleged amount he received from Vaughan in excess of his original investment of $300,000 made in 2001-04. He said he has spent about $35,000 fighting the clawback, but the legal battle has taken a toll.

“I’m just worn out. My health has gone to hell. I’ve lost 20 pounds,” Richards said. “I wake up at 12 o’clock wondering how to get out of this.”

Richards is among about three dozen defendants in seven clawback cases who inadvertently wiped out their chances for jury trials on what could be described as a legal technicality.

WAGNER: Trustee in Vaughan bankruptcy

WAGNER: Trustee in Vaughan bankruptcy

“I had every expectation I would win a jury trial,” he said. “Without a jury trial, my ass is grass. It’s not just me. It’s everybody else who settled, too.”

In the months following Vaughan Company Realtors’ filing for bankruptcy, the defendants all had taken the routine step of filing a “proof of claim” in court. The claim makes them eligible for any payouts that might be forthcoming from the company’s bankruptcy estate.

The legal technicality is that, by filing a claim, the defendants “extinguished” their right to a jury trial if sued by the bankruptcy estate in a clawback action, both U.S. Magistrate Judge Stephan M. Vidmar and U.S. District Judge William P. Johnson ruled in separate but related decisions.

The two decisions derailed the core strategy behind the defendants moving their cases from Bankruptcy Court, where the clawback litigation originated, to federal District Court. The rationale for the move is apparently that a jury of peers would be more sympathetic to their plight than a federal judge.

The defendants didn’t know they were giving up their right to a trial by jury when they filed their claims, their lawyers say in court documents. In May, the defendants attempted unsuccessfully to withdraw their claims.

Case law, which is basically judges’ decisions in similar cases from the past, appears to be a little muddy on the effect of a filed claim on the right to a jury trial in a clawback.

The Madoff bankruptcy case is tied to what’s been described as the biggest Ponzi scheme in history. Ponzi schemes purport to be legitimate enterprises but are investment scams where money put up by later investors is used to pay fictitious profits to earlier ones.In the Bernard L. Madoff Investment Securities bankruptcy case, for example, a judge in New York ruled that a filed claim did not block a jury trial in a clawback moved from Bankruptcy Court to District Court.

In Vaughan’s case, many small investors arrived relatively late in the scheme, when Vaughan was giving lower interest rates, said James Askew, Wagner’s lead lawyer in the clawbacks. Because they came later, they received fewer payments, he said.

These rank-and-file investors are the ones who were cleaned out by the 2010 collapse.

“The trustee is asking net winners and those who received very high interest rates, referral fees and high interest rates in lieu of referral fees to pay back the ill-gotten gains so that those small investors who received nothing can recover something,” Askew said.

Richards was sued in a clawback because he was an early investor with Vaughan, receiving an interest rate of 20 percent on his investment notes, he said. In addition, he noted Richards received around $160,000 more from Vaughan than his original investment.

Vaughan, 66, is serving a 12-year prison term.

 

Original Article By: Richard Metcalf- Journal Staff Writer