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Schemes and Scams Part I

An Halachic analysis of a Ponzi scheme’s fallout

While Ponzi schemes are not new, there have been an increasing number of such scams affecting our community of late. Taking advantage of the cohesiveness and trust of their friends and family, scammers are often able to lure increasingly larger investments into their get-rich-quick schemes. All too often, the easiest preys for such schemes are the most vulnerable: people in difficult financial straits who see the promised returns as their path to financial stability. People have been known to mortgage their homes and invest their life’s savings into such scams. When the scheme finally implodes, there may be dozens of victims who were hurt financially and emotionally. As a result, the aftermath of these schemes is often fraught with numerous conflicts among the victims.

The perpetrator himself deserves little halachic attention; what requires careful analysis is the halachic rights of the various affected parties. For example, the perpetrator generally has some assets that can be used to partially repay his victims. How are these funds distributed? Is there any priority for either the earlier or the more recent investors? Does halacha allow ‘clawbacks’, where investors that received phantom profits are required to return them? What about an investor who’s principal was returned with stolen money? And finally, what are the obligations of the family or friends of the scammer. Do they have an obligation to return to the victims any gifts that they received? Must a tzedaka return donations given by the crook? Does a merchant need to return any payments that the scammer made, which in hindsight were from stolen funds?

Before we begin, a word of caution is in order. As we will develop, the halachos and practicalities can be rather complex, and small changes in circumstance can have a drastic effect on the halacha. The purpose of this article is to help the reader gain an appreciation for the halachic approach, and is not intended for psak in any specific circumstance.

(Note: this article will analyze a simplistic case where the scammer received cash from his investors, which he paid out to others. The more typical case where monies were deposited into a bank account will introduce a new level of complexity, and will be addressed in a subsequent article.)

We will begin with some basic rules of hilchos genaiva. If a thief steals an item, the victim retains ownership of the item. Conceptually, if the thief then sells the item to an innocent third-party, the victim should be able to recover his belongings, and the purchaser would need to recoup his loss from the thief[1]. Someone who proverbially ‘bought the Brooklyn bridge’ obviously is not entitled to any ownership rights in his new purchase, as a thief simply cannot sell something he does not own. The purchaser would be compelled to return the item to its rightful owner, and then try to recover his payment from the thief. However, Chazal recognized the chilling effect this could have on commerce- people would be unwilling to transact with anyone that they did not personally know because of the risk that the merchandise was stolen and they would be liable to the victim. Therefore Chazal instituted a takanas hashuk, that an innocent purchaser who was unaware that he was buying stolen goods[2], need not return them to the owner unless he is reimbursed for his purchase price. The original owner must compensate the purchaser for the amount that he paid for the item, and may then recover his belongings. The owner then has a claim against the thief for the amount that he was forced to pay the purchaser. This takana was instituted to protect innocent purchasers; it therefore applies only when the buyer was unaware he was buying stolen goods. In contrast, if he had either actual knowledge of the theft, or if the purchase was made under suspicious circumstances where the buyer should have realized something was amiss, the takana would not apply, and he would have to return the item without receiving any compensation from the victim.

This takana was instituted to protect commerce. Accordingly, it would not apply to a gift. Furthermore, a creditor that is paid with stolen goods would not qualify for the takana and would have to return the goods to the rightful owner, and try to collect his debt from the thief’s true assets.

Shulchan Aruch (Yoreh Deah 177) discusses a case where a manager ‘generously’ gave an unauthorized  gift from his investor’s funds. Shulchan Aruch rules that the recipient must return the gift. Shach applies this ruling regardless of whether the recipient knew the funds were stolen. However, Prisha seems to argue that the recipient is not liable if he was unaware that the gift was stolen. Chavos Daas qualifies this dispute by stating that if the gift is still extant, all agree it must be returned to the rightful owner. The recipient cannot use the takanos hashuk as a shield, since he did not purchase the item. In contrast, if the gift was inadvertently lost, Chavos Daas argues that an innocent recipient would have no liability. He is not considered a shomer/guardian since never accepted any responsibility. If, however the recipient used the item up, in theory he should be liable to pay for its value (or at least for benefit that he derived from it). Nevertheless, Chavos Daas suggests that if a shinuy (a material change to the stolen item, which has the effect of transferring ownership to the thief) was made, the victim would have no claim against the recipient, and can only recover from the thief. Shach seems to argue and maintain that the recipient himself is liable to the victim regardless of his lack of knowledge. (see Shar Mishpat 72:30)

Applying this to our case at hand, an innocent vendor that sold goods or provided services to the schemer would not need to return the funds he received, as the takanas hashuk would apply. However, if the vendor was aware that the funds were stolen, or if the schemer paid more than the value of the item[3], the victim would be able to recover.

Any gift or donation received from the schemer would need to be returned according to the Shach, while the Prisha would only require its return if it is still in extant, or if it was destroyed by the recipient without a qualified shinuy.

The above would apply to phantom profits as well. If the scammer paid early investors ‘profits’ which subsequently prove to be illusory, they are effectively treated as gifts to the investor. Although he accepted the funds in the good-faith belief that he was entitled to them, once we learn the truth, they would be treated as gifts and subject to the parameters above. This leads to a fascinating distinction. If the scammer had a legitimate partnership with an investor and used stolen funds to buy him out, the investor would be able to claim the taknas hashuk and need not return the funds. Since he gave up his ownership interest in exchange for the funds, he qualifies as an innocent purchaser that is protected by the takana. In contrast, if the scammer used stolen funds to pay back an earlier investor in the phantom partnership, the funds would need to be returned. Although at the time of the redemption it appeared to be a sale, the reality is that the partnership never existed, and the transaction was a simple repayment of debt that does not qualify for the takanas hashuk. Thus, in contrast to civil law, even principle payments accepted in good faith may be clawed back, subject to the abovementioned dispute between prisha and shach.

As mentioned before, this entire discussion assumed a simplistic case where the investor delivered cash to the scammer, who then distributed the cash to others. The typical case where funds were deposited and transferred between bank accounts would be subject to an entire new halachic angle, which will be addressed in the next article.


[1] If the owner gave up hope of recovering the goods (Yiush), and the thief subsequently sold or gifted the item (shinuy reshus), the owner would have no claim against the recipient and can only recover from the thief.

[2] This takana applies only to mitaltilin, moveable goods, and not to real property.

[3] The takana requires the victim to reimburse the purchaser for his outlay. In cases where the purchaser received a discount on the item, he would only recover what he paid, and would be forced to give up the windfall. Consequently, if the thief overpaid the vendor using stolen money, the vendor would be obligated to refund to the victim the amount of overpayment.