The International Association for Asset Recovery (IAAR), of which I am a member, is a fruitful resource for investigators, lawyers, legal support personnel, and law enforcement. Among the members are Joe H. Dickerson (Certified Fraud Examiner, Certified Financial Investigator), and Dana Temple, a lawyer. Here following I offer you an excerpt from a book they are writing. Attributions follow the article.
Best practices
The Good News About Fraudulent Transfers
Joe H. Dickerson
When fraudulent transfers are found, it can be good news for a judgment-enforcement case. Obtaining documentation of the debtor’s transfer of assets becomes the very evidence needed to recover those assets.
The “Other” Fraud
When a debtor tries to hinder, delay or defraud a creditor by shifting assets to others for less than fair value, that is a fraudulent transfer. A common example is when a debtor transfers the title to his home to his wife’s name to keep it from creditors. Does it matter that he transfers assets to a spouse? It does not. Nor does it matter if he transfers assets to a child, a cousin, a business partner, a trust or a straw entity. It does not even matter that the transfer happened before a court renders a judgment, so long as the intent to hinder, delay or defraud was present.
The assets to look for include almost any real or personal property: cash, bank accounts, investments, jewelry, furniture, collections of all kinds, herds of animals, houses, land, water or mineral rights, industrial inventories and equipment, cars, boats, aircraft and so on. It can include the liquidated value of loans owned by others to the debtor. It can even include intellectual property like patents, copyrights or trademarks. Some exemptions exist; among them are retirement funds, tools of the debtor’s trade and homestead exemptions that vary from state to state.
When your client is a creditor in the collections process, you need to know about fraudulent transfers because discovering and undoing them can serve you well.
When a fraudulent transfer is found, it can be good news for your judgment-enforcement case:
The documentation of the debtor’s transfer of assets becomes the very evidence needed to recover those assets. When you show the judge that the transfer was a sham, the judge can simply void the transaction, enjoin any subsequent transfers, and you can seizes it immediately.
THE FOUR TESTS
There are four tests for fraudulent transfer:
Test 1: Subsequent Creditors: If a debtor entered into an agreement with you at a time when he was insolvent and the transfer was for less than fair value, the transaction was fraudulent.
Test 2: Existing Creditor: If, after your claim arose, the debtor became insolvent and transferred property for less than fair value to an insider such as a spouse or a business partner who should have known about their insolvency, the transaction was fraudulent.
Test 3: Circumstantial Evidence: If the debtor undertook his obligation to you or transferred any assets with the intent to subvert your rights as a creditor, that transaction was fraudulent.
Test 4: The fourth test uses the “Badges of Fraud” (see sidebar), which gives great latitude in determining if a fraudulent transfer has been made. It may apply even if the first three tests are inconclusive.
THE BADGES OF FRAUD
The nine “Badges of Fraud” are well established. Simply put, these behaviors are outward evidence or indicators offraud. They provide great latitude for a judge’s discretion in determining if fraudulent transfer has taken place.
Badge 1: Lack of consideration for the conveyance. Any valid contract requires consideration that meets the test of law, which means that the consideration must have value a reasonable person could agree to. For instance, conveying a million-dollar property in exchange for $10,000 doesn’t passthe “sniff” test of reasonability.
Badge 2: Transfer of the debtor’s entire estate. A person in good health and a rational state of mind doesn’t ordinarily dump everything he owns at once. To do so without a valid reason other than avoiding a creditor’s claim constitutes fraud.
Badge 3: Relationship between transferor and transferee. Any unusual “insider” transfer of assets may be suspect: wife to husband, child to parent, president to vice president, parent company to subsidiary, and so on. (Estate-planning or tax-planning or inheritance transfers may be “normal” when not done under pending or threatened litigation.)
Badge 4: Pendency or threat of litigation. This is a key provision, and it may apply from any time the debtor realizes he may become party to litigation, including the date of contract.
Badge 5: Secrecy or hurried transaction. This may seem obvious, but if a debtor takes actions to cover the tracks of his financial dealings, or if he transfers assets without going through what a reasonable person would consider the normal steps or normal precautions, it may indicate fraud.
Badge 6: Insolvency or indebtedness of transferor. If the debtor makes himself insolvent, it may indicate fraud.
Badge 7: Departure from the usual method of business. If the debtor abruptly starts doing business with radically different or inappropriate customers or suppliers or changes his policies regarding payables or receivables, it may indicate fraud.
Badge 8: Retention by the debtor of possession. If a debtor transfers his
vacation home to his child but leaves his own furniture in it and continues to use it for his own vacations, this indicates fraud.
Badge 9: Reservation of benefit to the transferor. If the debtor continues to use the vacation home from Badge 8 to entertain friends and clients or attempts to borrow money by offering the vacation home as collateral, it may indicate fraud.
The Best Approach
In our practice, we find that the best approach to collecting judgments is to investigate the debtor’s finances in depth before engaging in the legal process of interrogatories, debtors exams, subpoenas and so on. When a fraudulent transfer is found, it is good news. The transfer documents what assets the judgment debtor has attempted to hide and how. The transfer provides proof of the Badges of Fraud, and having that proof in hand leads to recoveries and expedient settlements.
Joe H. Dickerson, President of Financial Forensic Services, national judgment enforcement practice, has more than 45 years of experience. He is a Certified Fraud Examiner and Certified Financial Investigator.
This article is an excerpt from the book Financial Forensics and Judgment Enforcement currently being written by IAAR members Joe H. Dickerson, CFE, CFI, and Dana Temple, Esq., and is printed here with Mr. Dickerson’s permission.
A Different Slant
The following comments by other experts are from LinkedIn.
A report by the Financial Industry Regulatory Authority (FINRA) characterized the typical victims of investment fraud:
* Victims are [usually] male, married, educated and have higher income than non-victims.
* Victims [usually] score higher on financial literacy tests than non-victims.
* Victims are [usually] self-reliant and self-deterministic, relying on their own knowledge rather than consulting with others.
* They are [usually] more optimistic than others, probably reflecting “wishful thinking.”
Thursday, February 04, 2010 8:21:54 PM by Jerry McHale
While I agree that “one size fits all” with respect to generalities doesn’t work. I’ve worked on Ponzi’s varying in size from 3 or 4 million to 500 million and generally have found the perps to have sociopathic personalities. Most fail to take any responsibility for the plight of the victims to even going so far as to blame the victims. I’ve actually had perps tell me that if the victims weren’t so greedy they wouldn’t have given him their money.
I do disagree with the FINRA Characterization of the victims. While in sophisticated financial Ponzi’s, the victims may be higher educated and self reliant, unfortunately a large number of scams are perpetrated on the small blue collar investor who is trying to reach for just a few more points on his or her return, Even in Pearlman, where I was the receiver, while I did have a few who would meet the FINRA profile, most were unsophisticated folks who were taken in by the glamor of the boy band creator and the illusion of wealth he created, which obviously was going to bestow great opportunities and wealth on them.
These are the gut-wrenchers. I had one retiree who lost his life savings because he had an opportunity to “earn 11%” when the banks were only paying 5%”. The 6% difference on his $250,000 was going to ginve him $1250 more per month to live on and “Change my life”. Unfortunately it did change his life.
These perps are not only stealing $s, (sic) but in the situations i (sic) run across with the small reitiree investor -they’ve actually taken away their lives.
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