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112 Colum. L. Rev. 1376 (2012)
Bad Guys in Bankruptcy: Excluding Ponzi Schemes from the Stockbroker Safe Harbor

handle is hein.journals/clr112 and id is 1428 raw text is: BAD GUYS IN BANKRUPTCY: EXCLUDING PONZI SCHEMES FROM THE STOCKBROKER SAFE HARBOR Samuel P. Rothschild* The Bankruptcy Code (Code) reflects tension between two important goals: minimizing systemic risk in the securities market and remedying securities fraud. To minimize the displacement in the securi- ties market that a major bankruptcy in the industry can cause, the Code creates a safe harbor from avoidance actions that could otherwise claw back transfers completed prior to bankruptcy; this is known as the stockbroker safe harbor. To redress securities fraud, however, the Code exempts from the stockbroker safe harbor those avoidance actions brought to claw back fraudulent transfers completed prior to bankruptcy. But this exemption is incomplete such that the stockbroker safe harbor shelters fraudulent transfers made by a Ponzi scheme before a certain point in time. As a result, early investors in a Ponzi scheme retain profits at the expense of later investors, who rarely recover their principal investments. Courts have attempted to exclude Ponzi scheme transfers from the protec- tion of the stockbroker safe harbor provision by narrowly interpreting its terms and by holding that Congress did not intend for the provision to apply to Ponzi scheme transfers. This Note argues that each of these judicial approaches is inadequate and suggests other methods of exclud- ing Ponzi scheme transfers from the protection of the stockbroker safe harbor. INTRODUCTION On September 15, 2008, Lehman Brothers Holdings announced that it would file for bankruptcy.' The value of Lehman's shares immedi- ately fell more than ninety percent, and the Dow Jones experienced the largest single-day drop since the period following the terrorist attacks of September 11, 2001.2 On the day of Lehman's announcement, some predicted that markets would remain unstable,3 but one journalist reasonably wrote, It remains to be seen whether ... the controlled demise of Lehman will be enough to finally turn the tide in the yearlong financial crisis that has crippled Wall Street and threatened the broader * J.D. Candidate 2013, Columbia Law School. 1. E.g., Andrew Ross Sorkin, Merrill Is Sold: Failing to Find Buyer, Lehman Set to File for Bankruptcy, N.Y. Times, Sept. 15, 2008, at Al. 2. E.g., Alex Berenson, Fearing Worse To Come, Investors Drive Dow to Biggest Loss Since '01, N.Y. Times, Sept. 16, 2008, at C7; Ben White & Michael M. Grynbaum, After a Losing Battle Against Bankruptcy, Workers Pack Up and Wonder, 'What Now?,' N.Y. Times, Sept. 16, 2008, at Cl. 3. E.g., Berenson, supra note 2. 1376

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