Often fraud victims in schemes where there are multiple victims ask us how recovered funds would be distributed in the event of a partial recovery. The question is often asked in the context of whether they should cooperate and join their recovery efforts with other victims, or whether they should try to prioritize their recovery ahead of others. There is an answer, but it is often not a simple one.

Examples of Multiple Victim Partial Recovery Frauds

The Ponzi scheme was named after Charles Ponzi (1889-1949), a small time swindler who “hit the big time” – when he invented a lucrative con (confidence scheme) in the 1920s that netted him more than $15M. Ponzi’s con was simple but seductive. He borrowed money from investors in exchange for giving them his personal promissory notes. He promised to pay investors $1.50 for every $1.00 they gave him within 90 days. He convinced his investors that he was engaged in buying international postal coupons in foreign countries and selling them in other countries at a 100% profit. When the story got around that Ponzi was paying his impressive return within 90 days, the scheme took off. In reality Ponzi was not investing at all, but rather skimming for himself while using new investor money to pay existing investors. When the scheme finally ended due to a lack of new investors, there was a large pool of victims seeking to recover from a pool that represented a fraction of their total losses.
Fast forward to 2013 – to the multi-million dollar Ponzi scheme of Hamilton investor Terrence Bedford through his company Greyhawk Equity Partners Limited Partnership. For more than a decade, Bedford accepted investor funds through Greyhawk but did not invest the money as he promised. Bedford induced the investors with tales of high returns through his confidential investment program. Bedford’s phony returns incited new investors to contribute. Bedford kept his investors in the dark by providing them with false financial statements and forged audited statements purportedly authored by PriceWaterhouseCoopers (when, in fact, they were fraudulently created by Bedford). Like most scams of this nature, new investor funds finally ran out and Greyhawk could not pay out on redemption demands. Bedford eventually admitted his fraud and his investors brought commenced proceedings against him.

Rescission as a First Step to Determining the Quantum of Investor Losses

In the Greyhawk case, the investors first sought a declaration of fraud, and on this basis the investors sought a second declaration that their investment contracts be rescinded. With these declarations, the investors sought judgment for the return of their capital, interest and their costs.
The Court agreed, holding that the investors were entitled to be put in the same position that they would have been if the false representations of Bedford had not been made. The Court further held that the investors were not entitled to be put into the position they expected to be in if the representations had been true (see Boughner ats Greyhawk Equity Partners Limited Partnership, 2013 ONSC 163 (CanLii), at paragraph 36), but were entitled to a rate of pre-judgment interest higher than that provided by the Courts of Justice Act, a so called “compound rate,” as they had reasonable expectations of a higher return on their invested capital (see Boughner, paragraph 38).
It is noteworthy that the Court held the investors were not entitled to be put in the position they expected to be if the representations had been true. The Courts have the discretion to award victims in breach of trust cases an amount they would have received if the breach had not occurred. The Courts, however, will often not award such a recovery:

  1. where there are multiple victims who expected different rates of return;
  2. where there is only a partial recovery of the total loss; and,
  3. in cases where the initial promise was an unrealistic windfall.

To state the matter otherwise, the Courts are not in the business of awarding fraud victims judgments based on schemes that are objectively too good to be true.

Disagreement Amongst Investors on How to Disburse a Partial Recovery

The Court in Greyhawk faced the issue of resolving how to allocate amongst investors a partial recovery on the judgment granted, in a scenario where some investors had received some or all of their capital back through early redemptions, and others who invested during the later part of the scheme who were out their entire investment. Fortunately for the Court, the investors had appointed a receiver, and the receiver provided the Court with a detailed and comprehensive analysis. Unfortunately for the Court, the investors disagreed on how the partial recovery should be divided.
The Court determined that it was obliged to distribute a partial recovery utilizing what is dubbed as the Lowest Intermediate Balance method (the “LIB Method”) unless it was unworkable, in which case it was obliged to distribute the recovery utilizing the Pro Rata Based on Contributions method (the “Pro Rata Method”): see Boughner ats Greyhawk Equity Partners Limited Partnership, 2012 ONSC 3185 (CanLii), confirmed 2013 ONCA 26. What follows is an explanation of these two distribution models.

Pro Rata Based on Contributions Method

The argument for the Pro Rata Method is often thought as appropriate where there is only a partial recovery, where the funds have been commingled by the fraudster, and where the funds are to be distributed only between innocent investors. Unlike the LIB Method, the Pro Rata Method does not depend on the timing of investments to prioritize certain investors over others. Rather, the Pro Rata Method treats the commingled fund as a whole fund, and the timing of the investment is irrelevant in cases where the fund was based on a fraud from the start.
In the Pro Rata Method, the early investors who received funds from the fraudster have their allocation of the fund reduced by the amount they already received. This may result in the early investors still ahead of the later investors who obtain a partial return based on their total loss. The Pro Rata Method is attractive for the purposes of administration because it is simple. It does not require tracing of each investor’s funds through a commingled fund. It does not require consideration of the timing of the investment. The Pro Rata Method is sometimes thought as unfair, however, as early investors may obtain a better recovery than those who invested later in the scheme.

Lowest Intermediate Balance Method

The LIB Method is only appropriate where the funds in the mixed fund can easily be traced. It operates on the premise that just as early investors would not have expected to share their gains with those who invested at later time, these same early investors should also not be allowed to share their losses with later investors. To state otherwise, it is based on the notion that justice dictates that commingled funds should be distributed proportionally on the interests of the investors at the time of the commingling (and the timing of the return).
The problem with the LIB Method is that it is often quite complex. By way of a simple example:

  1. John invests $100 in a fund;
  2. the value of the fund then declines to $50;
  3. Jane then invests $100, increasing the fund’s balance to $150; and
  4. the value of the fund then further declines to $120.

Applying the LIB Method, John could not claim more than $50, because that is the lowest balance in the fund prior to Jane’s investment; the initial decline from $100 to $50 is borne entirely by John. Jane’s $100 contribution constitutes 2/3 of the $150 in the fund. As a result, when the fund declines to $120, 2/3rds of the decline is borne by John, while 1/3rd is borne by Jane. Therefore, of the $120 remaining in the fund, John gets $40 while Jane gets $80.
Imagine the complexity of cases where there a multiple victims and multiple dates of investment. If, on the other hand, the funds were distributed using the Pro Rata Method based on original contributions, John and Jane would each receive $60, since both invested an equal amount.

The Law in Ontario on Distribution of a Partial Recovery Amongst Multiple Victims

In the Greyhawk case, the Court found that the common law endorsed the LIB Method as the presumptive method, and held that it should be applied unless the facts render it “practically impossible to do so.” The Court held that distribution via the Pro Rata Method is an exception to the general rule. The Pro Rata Method is appropriate in circumstances where the LIB method is not economically feasible, such as in cases involving very large numbers of beneficiaries and transactions, or unworkable business records.
In Greyhawk, the uncontroverted evidence of the Receiver was that calculations using the LIB Method were possible. The Receiver was able to convince the Court that by the time of the later investors’ investment, it was clear that the earlier investors had already lost over 88% of their investments’ value, so it would not be fair to make the later investors subsidize the losses of the earlier investors that had occurred prior to their involvement. The Court accordingly held that although more complex, the LIB Method was just and equitable in the circumstances.

How Did the Court Divide the Recovery In the Ponzi Case?

It has been said that unravelling a Ponzi scheme to return a shortfall of money back to multiple victims is akin to untangling the noodles of a half eaten bowl of spaghetti at a buffet, and then determining who cooked each strand. In the Ponzi case, it was impossible to trace any investors’ money in the pot that was recovered, and accordingly the Pro Rata Method was used: see Cunningham ats Brown et al (1924), 265 US 1 (44 S. Ct. 424, 68 L. Ed. 873).
What Should Happen With the Proceeds Received by Not-So-Innocent Investors?
Another difficulty in these cases is determining what should happen with innocent investors and not-so-innocent who received all of their investment back based on money from later innocent investors who incurred their loss at the time the fraud was discovered. If the early investors are deemed to have known that the scheme was too good to be true (not-so-innocent), can they be ordered to pay their return into the recovery pot to be divided amongst all investors? This issue was addressed in the Madoff recovery. It is a complex issue we will explore in another blog.


Investment frauds, like all frauds, are based on breach of trust. They often involve multiple victims and commingled funds, where only a partial recovery is possible. If you discover you are a victim of fraud, contact us to have your case assessed and a strategy for recovery mapped out before contacting police or alerting the fraudster.