This means as a matter of logic that each investor, at some if not necessarily all phases of the promotion, was to put money at risk which could only be recouped if others also bought into the scheme.
A house of cards of the kind suggested by the quoted statement from the report obtained by the bank is sometimes known in its more colorful manifestations as a "Ponzi" scheme or "bubble." Such promotions depend on a steep information gradient favorable to the insiders (possibly here the "nuclear group") and unfavorable to the investors who become enmeshed in the toils of the scheme. That gradient was present here, favorable to the bank as well as to the promoters and unfavorable to the plaintiffs who have now been sued on promissory notes signed in connection with this prepackaged promotion.
Where the necessary intent is present, deliberate knowing participation in furthering a Ponzi-type scheme constitutes participation in a scheme or artifice to defraud violative of the federal mail fraud statute (18 USC § 1341). See United States v. Armantrout, 411 F.2d 60 (2d Cir. 1969).
Consumers or uninformed investors are entitled to protection from losses where they borrow from entities which are recommended or solicited by sellers of goods, services or investment interests that turn out not to meet expectations deliberately created in the minds of the less informed parties.
If fraud is involved in a transaction, a financing entity which deliberately shuts its eyes to clues concerning the fraud may be unable to enforce promissory notes signed as a result of the fraud. See National Union Fire Ins. Co. v. Turtur, 892 F.2d 199 (2d Cir. 1989); Morgan v. McNiff, 797 F. Supp. 325 (S.D.N.Y. 1992); see also N.Y. Gen. Bus. Law §§ 349-340.
The perceptions underlying the Federal Trade Commission Holder in Due Course Rule, 16 C.F.R. pt. 433, 40 Fed. Reg. 53524 (Nov. 18, 1975), subjecting financiers recommended by a seller of consumer goods or services to claims or defenses the consumer might have against the seller, support this principle. See generally Smith, "Preserving Consumers Claims and Defenses," 63 A.B.A.J. 1401 (Oct. 1977); Chaffin, "Holder in Due Course and the FTC Rule," 42 Consumer Fin. L.Q. 124 (1988).
The bank is not entitled to summary judgment.
Dated: White Plains, New York
April 5, 1993
VINCENT L. BRODERICK, U.S.D.J.