Humpty Dumpty in Bankruptcy

The government appoints a receiver for assets left from a fraudulent scheme. Here is what happens next, from Ponzi Regulation:

“The receiver filed for protection under Chapter 11 of the Bankruptcy Code…the legal route typically taken by troubled companies that continue to operate and need time to reorganize. …

Manhattan Capital was unlike other companies that go through Chapter 11. It was unlike most small businesses, let alone a Lehman Brothers with many functioning parts. The hedge fund was a financial Humpty Dumpty broken beyond repair. It could not be put back together again under any circumstance—there was no functioning business. A hedge fund is based on the skills of one or a few individuals and is typically shuttered if the skills are not there. …

There was no question of reorganizing Manhattan Capital, which had never achieved its proper goal, namely making money for investors. This was obvious before the bankruptcy filing. …

In effect, the estate was already set up for the purpose of winding down and returning the assets. For that purpose Chapter 11 protection did not appear to be necessary.

This is what some of the investors argued. They worried that while they were forbidden to touch their own money, it was likely to be spent on legal maneuvers in the course of a complicated bankruptcy process. So they sought a different legal status and possibly a different court. …

Legal opinion varies as to what law to use in winding down international hedge funds, but Chapter 11 is not the usual recommendation. …Chapter 7, a simpler and cheaper process, provided a better way to deal with the assets…”

But shareholders could not stop the receiver’s Chapter 11 filing, with the result that the estate remained in bankruptcy year after year, the assets available to the lawyers but not the investors.

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