Securities Industry Commentator by Bill Singer Esq

The supreme court holds that under the Colorado Uniform Fraudulent Transfer Act ("CUFTA"), an innocent investor who profits from his investment in an equity-type Ponzi scheme, lacking any right to a return on investment, does not provide reasonably equivalent value based simply on the time value of his investment. In this case, an investor unwittingly invested in a Ponzi scheme. Before the scheme's collapse, he withdrew his entire investment, plus a profit. A court-appointed receiver sued to claw back the investor's profits under CUFTA section 38-8-105(1)(a), C.R.S. (2018), which provides that a "transfer made . . . by a debtor is fraudulent as to a creditor . . . if the debtor made the transfer . . . [w]ith actual intent to hinder, delay, or defraud any creditor of the debtor." The investor raised an affirmative defense, § 38-8-109(1), C.R.S. (2018), contending he could keep his profit because he "took in good faith and for a reasonably equivalent value." Because the time value of money is not a source of "value" under CUFTA and equity investors have no guarantee of any return on their investments, the supreme court concludes that the investor did not provide "reasonably  equivalent value" in exchange for his profit. Accordingly, the supreme court reverses the judgment of the court of appeals.

1. This proceeding concerns Respondent's failure to file certain Suspicious Activity Reports ("SARs") as required by Section 17(a) of the Exchange Act and Rule 17a-8 thereunder. These provisions require broker-dealers, such as Respondent, to comply with the Bank Secrecy 2 Act ("BSA") requirement to file SARs. The BSA and implementing regulations require brokerdealers to file SARs with a federal governmental agency -- he Financial Crimes Enforcement Network ("FinCEN") -- to report certain suspicious transactions that are conducted or attempted by, at, or through the broker-dealer. See 31 C.F.R. §1023.320(a) (the "SAR Rule"). 

2. From 2013 to September 2015, Respondent terminated its business relationship with 111 independent investment advisers ("Advisers") that Respondent determined presented an unacceptable business, credit, operational, reputational, or regulatory risk to Respondent or its customers.1 Although it filed a number of SARs relating to suspicious transactions of certain terminated Advisers, Respondent failed to file SARs on the suspicious transactions of a number of other terminated Advisers. Respondent's failure to file the SARs resulted from its failure, at the time, to consistently and appropriately refer terminated Advisers and their possibly suspicious transactions to the firm's Anti-Money Laundering Department (the "AML Department"). As a result, Respondent willfully violated Section 17(a) of the Exchange Act and Rule 17a-8 thereunder. 

Requiring a company to instead cater to other interests therefore risks compromising not only its shareholders' interests, but the public interest as well. It complicates boardroom decision-making and muddles the effectiveness of price as a signal of the company's value. Valuing a company that is dancing to the tune of multiple fiddlers is no easy task, so an uncertainty discount would inevitably be built into the price of the company's shares.

When an investor buys a piece of a company, the price she pays reflects certain understandings about the board's duty to the company, and by extension, to its shareholders.  Directing companies to give priority to stakeholders rather than shareholders would lower the value of existing shares and hence the price investors are willing to pay for an ownership interest in the company. . .

• Securities Industry Commentator
• Bill Singer