Daryl Heller’s ATM investors might be forced to return money; appointment of a bankruptcy trustee could lead to ‘clawbacks’

• By Chad Umble / LNP | LancasterOnline

Anyone who got money through Daryl Heller’s ATM investment network could soon face the prospect of having to give it back.

Heller’s recent indictment on criminal fraud charges makes it very likely that a trustee will be appointed in his ongoing bankruptcy case, two experts agree. And a trustee overseeing what federal law enforcement officials describe as a $400 million “Ponzi-like” case would try to recoup — or “claw back” money — from anyone, including unwitting investors, who received money from the scheme.

“If it’s really a Ponzi scheme, the people who received money are going to get sued. And they’re going to get sued to turn back money to the extent it exceeds their initial investment,” said Bruce A. Markell, a former bankruptcy judge who is a professor at Northwestern University’s Pritzker School of Law.

Markell, who spent nine years as a federal bankruptcy judge, said the details about the Heller case that were explained to him by an LNP | LancasterOnline reporter are similar to other Ponzi cases — including Bernie Madoff’s $65 billion Wall Street scheme — where trustees aggressively worked to recover money from partners and investors who made money off the scheme.

“My guess is you’re going to find a lot of those people filing bankruptcy too,” Markell said.

In addition to opening a path for suits to claw back funds, the appointment of a trustee would end Heller’s control over his own finances as the trustee would look to liquidate assets in order to create a pool of cash to pay creditors.

Robert Chernicoff, a Harrisburg bankruptcy attorney, said any trustee appointed in Heller’s bankruptcy case could work to claw back money regardless of whether Heller is convicted or not.

“It has nothing to do with conviction,” Chernicoff said. “A transfer without proper consideration is what happens in these Ponzi schemes. They are voidable. They are not void, but someone has to go after them and that is the trustee’s role.”

Based on insights from Chernicoff and Markell, here are some possible next steps in the Heller bankruptcy case.

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READ: Vantus Wealth buys Daryl Heller’s former Lancaster city offices sold for $2.8M

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Appointing a trustee

It is rare for a trustee to be appointed in a personal Chapter 11 bankruptcy, but multiple creditors in Heller’s case have been calling for one, saying Heller can’t be trusted to handle his assets and finances. Those calls got louder following the report last month from a court-appointed examiner who found hallmarks of a Ponzi scheme in Heller’s ATM investment network. The bankruptcy judge has scheduled an Oct. 22 hearing to consider the appointment of a trustee.

“I’m pretty sure there will be a trustee if there’s already been an examiner. Usually that follows if there is some wrongdoing that has been found,” said Chernicoff, who was familiar with some details of the Heller case but doesn’t represent anyone involved.

Markell said he assumes a trustee would be appointed in Heller’s bankruptcy case, saying it would be the right thing to do.

“The judge already appointed an examiner. You appoint (an examiner) to determine whether you can trust the debtor to run the business. It sounds like that ship has sailed – you can’t,” Markell said.

Up until now, Heller has remained in control of his assets as “debtor in possession,” even as he has had to get court approval to make changes. A trustee would usurp that role and seize control of all Heller’s assets.

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Read the federal indictment against Lancaster County businessman Daryl Heller

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Determining who takes control

In its indictment against Heller, the Department of Justice said it is seeking the forfeiture of up to $770 million in his assets, which are the same assets the bankruptcy court is trying to liquidate and distribute. The Securities and Exchange Commission, which also filed a complaint against Heller, can also seek to recover money on behalf of the victims of fraud.

“What’s going to happen is the SEC will try and go after the funds through the Justice Department,” Chernicoff said. “In turn, the bankruptcy trustee is probably going to argue that he has jurisdiction over those funds, and he should be making the distribution.”

In most cases, Chernicoff said, an agreement is worked out between a bankruptcy trustee and federal law enforcement officials about who has oversight.

The SEC and a bankruptcy trustee would have slightly different agendas since the SEC is focused on making restitution to investors while the bankruptcy trustee would consider all creditors, Markell said.

“The cardinal rule in bankruptcy is that creditors get paid before equity investors get anything,” Markell said. “The SEC is typically set up to protect equity investors and not creditors.”

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Read the Securities and Exchange Commission civil charges against Daryl Heller

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Clawing back payouts

Federal law enforcement officials as well as the court-appointed examiner in Heller’s bankruptcy have all described a scheme in which old investors were paid with money from new investors. When money stopped coming in from new investors, the scheme collapsed.

In such scenario, the money from newer investors wound up in the pockets of older investors. A trustee in such a case would look to even out the losses by clawing back money from people who came out ahead.

Markell said that well-established legal precedent can be hazardous for investors since it could require them to give up money they thought was a return on their investment but was instead what the court considers a “fraudulent transfer.”

“If in fact, it’s a Ponzi scheme, then they’re not really getting paid their return on their investment; they were just getting money that they really had no legal right to,” Markell said. “And if that’s the case, a bankruptcy trustee can sue the recipients of the money to return it.”

The practical effect of this, Markell said, is that a trustee would file a flurry of lawsuits against anyone who received money from the ATMs. Since a trustee in a bankruptcy case is paid based on how much money they recover — 3% for every million they distribute to creditors — Markell said that person would be motivated to cast a wide net.

“What you’re going to have, unfortunately, is a feeding fest for lawyers,” Markell said.

Markell said he was a mediator in a case where a trustee filed 250 lawsuits against investors who got money.

In Heller’s case, one likely target for a trustee seeking to recover money, Markell said, is the $60 million the SEC said Heller caused to be paid to fund managers who recruited investors.

Instead of being made from actual profits generated by the ATMs, the SEC said those payments to fund managers “consisted mostly of re-circulated funds, and not ATM revenue.”

Consolidating assets

In addition to suing against investors or Heller’s partners, Markell said a trustee would likely look to squeeze revenue out of the other companies Heller operated through scores of different limited-liability companies.

“If I were managing this, I would want them all in bankruptcy before one judge,” Markell said.

Other ways a trustee could streamline the case, Markell said, would be working toward an overarching settlement in which anyone who received money pays into a pool of money that is distributed to people who lost.

In a best-case scenario, Markell says the case could be resolved in a year, but it could also stretch to five to 10 years if the issue gets bogged down with litigation.

“No one’s going to get 100 cents on the dollar,” he said. “But good lawyers know that a quick management of things will produce the highest return possible.”