Ponzi Recovery Effort Ends on a Low Note

PHILADELPHIA (CN) - With most of the funds from a $17 million Ponzi scheme "likely lost forever," a federal judge on Thursday wound down the process to make Robert Stinson's bilked investors whole.

The resolution does not give an ideal result to any party, a somewhat fitting end for a case whose facts U.S. District Judge Berle Schiller describes as "truly unfortunate."

It has been four years since the court gave Stinson a 33-year federal prison sentence for scamming 262, mostly elderly, victims over the course of four years.

In the time since, court-appointed receiver Kamian Schwartzman, and her attorney Gaetan Alfano, recovered just $1.6 million for the investors Stinson defrauded.

Those hours Schwartzman and Alfano spent in pursuit of Stinson's ill-gotten gains, which included a lawsuit against "Saved by the Bell" star Dustin Diamond, put their bill at $2.5 million. Having recovered just $770,000 in fee petitions to date, they recently asked the court to grant them all remaining funds in the receivership estate, just $423,000, as their final fee award.

The Securities and Exchange Commission countered that the court should distribute either half or all of the remaining funds to defrauded investors.

Though the receiver also recommended an alternative plan for the investors to share in some of the remaining estate, Judge Schiller chose the SEC's 50-50 distribution proposal on Thursday.

"Under the commission's plan, each defrauded investor will recover approximately 1.3 percent of his or her investment," he wrote.

The receiver's alternative plan would divide the investors into three tiers based on net loss, and each member would take home either $350, $550 or $850

Schiller found this "tiered distribution plan fails to treat similarly situated investors equally," and "causes vastly different results among the investors."

"For example, Investors 112, 168, and 263, who each invested $2,000, would recoup over 17 percent of their investment, while Investor 128, who invested over $500,000, would recoup only 0.15 percent," the ruling states. "The unfortunate consequence of the net investment method is that all investors will receive a low payout and no investor will be made whole. However, this court cannot arbitrarily select winners and losers among investors who were all harmed in the same manner. Therefore, the commission's plan is a superior method for the circumstances of this particular case."

In finding that the receiver deserves some additional consideration, Schiller noted that "refusing to award the estate professionals any further fees would deprive the professionals of fair compensation for services rendered."

Praising their "exemplary" work on the case, Schiller said the receiver should not be penalized because the victims' best hope of a large recovery, a ratings agency called Morningstar Inc., evaded liability.

The SEC and the investors had supported the receiver's claims that Morningstar abetted Stinson's scheme by giving his fraudulent hedge fund, run by his company Life's Good Inc., a top rating.

Though the receiver could have closed the estate prior to the Morningstar trial, allowing for a distribution to investors while still satisfying all professional fees, she pursued the claims "at the urging of the commission and numerous investors ... to achieve a greater recovery for the investors," according to the ruling.

"This court granted judgment in favor of Morningstar not because of any deficient performance by the receiver and counsel, but because Congress has failed to regulate effectively entities that publish information about investment vehicles," Schiller wrote. "The court must apply the securities laws passed by Congress, whether the court agrees with the outcome or not. Regrettably, Congress' woeful dereliction of its duties has further victimized the defrauded investors in this case."

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