(CN) - A trust that profited from Arthur Nadel's multimillion-dollar Ponzi scheme may owe interest on its investments returns, the 11th Circuit ruled.
Arthur Nadel was a hedge fund manager who ran a massive Ponzi scheme that collapsed in 2009.
Over 10 years, Nadel raised at least $336 million from investors by misrepresenting the net profits of his funds with false monthly statements showing increases in investor accounts that did not exist.
Instead, investor money was used to pay redemptions to earlier investors and management fees to Nadel.
After the scheme's collapse, Nadel was sentenced to 14 years in prison, and ordered to pay $174 million in restitution. He died in custody in April 2012.
Vernon Lee and the Vernon Lee Trust invested with Nadel in the early days of the scheme, and were therefore some of the lucky investors who received net profits on their accounts.
After Nadel's indictment, the funds' receiver sought to "claw back" profits distributed to investors, including the Lee entities, which were not income from their investments but funds from other investors.
A federal judge entered judgment in favor of the receiver and against the Lee defendants for $935,631, without prejudgment interest.
He had found that "the Lee defendants have suffered enough," and "it would be inequitable to require them to pay more than the amount of their false profits to the receivership entities."
A three-judge panel with the 11th Circuit affirmed the award Monday, but remanded for reconsideration of whether Lee and his trust should pay prejudgment interest on the money.
"The general observation that the Lee defendants 'have suffered enough' does not explain why the receiver is not entitled to be made whole under Florida law, which holds prejudgment interest is an element of pecuniary damages," the opinion states. "Further, that the Lee defendants will be forced to pay more than the profits they received with the addition of a prejudgment interest award is not an equitable factor weighing against an award, but is a necessary consequence of the loss theory of prejudgment interest."
Prejudgment interest is not a windfall or a necessarily punitive measure, the court said, but a part of full compensation which corrects for the time value of money.
Sitting on the panel by designation from Montgomery, Ala., U.S. District Judge Mark Fuller wrote the decision for the Atlanta, Ga.-based court.