A new client invested in a ponzi scheme. He withdrew his investment, including a “profit” just before the ponzi scheme collapsed. The SEC appointed a receiver to go after investors who received profits as fraudulent transfers. Many courts have held that ponzi profits are fraudulent transfers that may be recovered to repay other investors. This client wanted to know if her profits are protected because she invested in the ponzi scheme through her self-directed Roth IRA.
The client’s Roth IRA is exempt under Florida statute 222.21. A general judgment creditor could not garnish money in her IRA. In this case, because the ponzi investment was titled in the name of the Roth IRA and the investment check written directly from the IRA’s checking account, the client wanted to know whether the receiver could sue the IRA directly. The client is concerned that even through his IRA beneficial interest is an exempt asset the IRA itself is not immune from being sued as a party defendant. The client pointed out there is no statute that prohibits someone from suing an IRA as the party .
I had never heard of an IRA being a party to a lawsuit, but there was sufficient logic to the client’s concern that I did some legal research. I quickly found a bankruptcy case involving the debtor’s receipt of ponzi scheme winnings. The court held that there is no distinction between an IRA and the IRA individual beneficiary. An IRA is a self-settled trust created by the owner; it is similar to a revocable living trust except that Florida statutes provide this type of trust is creditor protected. There is not distinction legally between an individual and his IRA.
Therefore, an IRA is not a legal entity separate from the individual owner so a third party cannot sue an IRA independent of its owner. Therefore, if a ponzi scheme made fraudulent transfers in to an IRA the receiver’s cause of action is a fraudulent transfer suit against the IRA owner individually. If the receiver obtains a money judgment against the individual investor, the individual’s interest in his IRA is still an exempt asset, fully protected from the receiver’s execution of the money judgment.
Last updated on May 22, 2020