Many individuals entrusted their life savings to Joe Forte. The victims$’$ impact statements read at Forte$’$s sentencing spoke of ruined lives, lost inheritances, healthcare concerns, and worthless retirement accounts. Adding to the victims$’$ devastation was the fact that many considered Forte a trusted personal friend.

On March $30,2009$ the United States District Court for the Eastern District of Pennsylvania established a receivership taking jurisdiction and possession of the assets and records owned by Joe Forte and the limited partnership. The court states $“$The goal and purpose of the receivership is to assume control of$,$ marshal, pursue, and preserve the Receivership assets with the objective of maximizing the recovery of defrauded investors and, to the extent that the assets recovered may be inadequate to make them whole, ensuring that the distribution of those assets is as just and equitable as practicable.$”9$The court appointed Marion A$.$ Hecht, CPA, CFE, CIRA, CFF$,$ MBA as receiver, whose primary role is to locate all assets owned by Forte, and file claims to these assets on behalf of the receivership. The goal of the receiver is to maximize recoveries for fraud victims. If enough assets are not located to pay back all investors in the entirety, then an equitable system of distribution must be determined. This system must be approved by the Court$\mathrm{.}9$

Ultimately investor losses should be shared equitably among all investors. The receiver and her team determine if each investor is a net winner or a net loser. Net winners withdrew their principal and some profit; while net losers withdrew less than their principal. Investors may fall into one of the following groups:

$(1)$ Net winners $–$ subject to clawback of net winnings only;

$(2)$ Net winners $–$ subject to clawback of net winnings plus some or all principal;

$(3)$ Net losers $–$ subject to clawback of some or all principal;

$(4)$ Net losers $–$ not subject to clawback of any principal but claims will be denied in whole or in part; and

$(5)$ Net losers $-$ claims allowed.

$“$Clawback$”$ includes dollars previously distributed fraudulently to investors that are now required to be returned to the receivership. $“$Cashing out$”$ of a Ponzi scheme early does not guarantee that one will keep their profits. $“$Clawbacks$”$ also relate to fraudulent gifts to individuals and charities.

Investors who have lost money must submit a claim to the receivership. For the Forte case, Hecht has indicated she will determine investor payouts based on qualitative and quantitative analyses. A qualitative analysis will focus on an investor$’$s $“$state of mind$”,$ specifically considering whether the investor was a culpable participant in the scheme or on inquiry notice. $($Inquiry notice is the point at which an investor should have realized that a fraud is being committed.$)$ Investors deemed culpable will not receive a distribution. If it is determined an investor is on inquiry notice, they will share equitably in distributions if they return withdrawals made after on inquiry notice or if a court approved agreement is made reflecting a recommended claim amount. Finally, investors not on inquiry notice will receive their equitable share of distributions.

In the Forte case, Hecht will use a $“$hybrid method$”$ of distribution. She will distribute $50$ percent of the assets using the Rising Tide Method, and the remainder using the Net Investment Method$\mathrm{.}11$ The Rising Tide Method focuses on percentages lost. The method requires that assets are first distributed to investors who lost the highest percentage of their investment until investment percentage losses are even for all. The Net Investment Method focuses on total dollars lost. Under this method, distributions equal:

Investor Loss X $($Total Distribution to all investors$/$Total Loss to all investors$).$

Also consider the plight of the not$-$for$-$profit organizations that received Ponzi scam dollars in the form of Joe Forte contributions. The receivership is demanding that these donations be returned.

Required

Comment on the $“$fairness$”$ of the role of the receiver. Specifically identify what you think is fair and unfair in her plan.$($hybrid method $-$ distributing $50$ percent of the assets using the Rising Tide Method, and the remainder using the Net Investment Method. quantitative analysis, qualitative analysis$)$

The Thomas D$.$ and Elizabeth S$.$ Hooper Foundation is a victim of the Forte scam. The Foundation made donations to the Hilltop School as well as other non$-$profit organizations. As a result, who else automatically becomes a victim?

Who may have been on $“$inquiry notice$”$ and alerted by $“$red flags$”$ while the Forte fraud was in process?