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UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
In re:
KEVIN G. CARNEY,
Debtor.
________________________________________
DAVID P. LEIBOWITZ, as Chapter 7 Trustee for
KEVIN G. CARNEY,
Plaintiff,
v.
[Defendant],
Defendant.
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Chapter 7
Case No. 09-18053
Hon. Pamela S. Hollis, Presiding
Adv. No. ______________
COMPLAINT
David P. Leibowitz (the “Trustee”), not individually, but as the chapter 7 Trustee for the
estate of Kevin G. Carney (the “Debtor”) hereby complains as follows:
NATURE OF THE ACTION
1.
This is an adversary proceeding by the Trustee against [Defendant] (the
“Defendant”), to avoid $115,000.00 in actual and constructive fraudulent pre-petition transfers
made by the Debtor to the Defendant.
JURISDICTION AND VENUE
2.
This Court has jurisdiction pursuant to 28 U.S.C. § 1334(b) because this
adversary proceeding arises in, arises under, and is related to the Chapter 7 case, In re Kevin G.
Carney, pending in the United States Bankruptcy Court for the Northern District of Illinois,
Eastern Division, as Case No. 09-18053.
Case 11-01121
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This Court has personal jurisdiction over Defendant pursuant to Federal Rule
of Bankruptcy Procedure 7004(f).
4.
Venue is proper is this District pursuant to 28 U.S.C. § 1409(a).
5.
This Complaint is a core proceeding pursuant to 28 U.S.C. § 157(b)(2).
THE PARTIES AND RELATED ENTITIES
6.
On May 19, 2009, twelve creditors of the Debtor filed a petition under 11
U.S.C. § 303 of the United States Bankruptcy Code, thereby commencing a chapter 7
involuntary bankruptcy against the Debtor.
7.
Plaintiff David P. Leibowitz is the chapter 7 Trustee for the Debtor, duly
appointed under 11 U.S.C. § 701(a)(1) of the United States Bankruptcy Code by the Office of the
United States Trustee.
8.
The Trustee brings this adversary action on behalf of the Debtor’s estate.
9.
The Debtor is an Illinois resident who engaged in the operation of Ponzi
scheme involving over 600 individual investors totaling approximately $20.5 million of principal
investment and approximately $5 million in net investor losses. The Debtor is currently serving
an eight year sentence, based on a plea of guilty in Cook County to theft, securities fraud, and
financial exploitation of an elderly person.
10.
Defendant is a resident of Prospect Heights, Illinois and was at all applicable
times an investor in the Debtor’s Ponzi scheme.
BACKGROUND
11.
Beginning in approximately 2005, the Debtor began a Ponzi scheme in which
he promised potential investors 15% - 20% returns per month, every month. In some cases, the
Debtor promised to provide an even higher rate of return in order to account for the capital gains
tax an investor would have to pay, thereby ensuring a net return, after taxes, somewhere between
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15% - 20%. In addition, the Debtor promised some investors further returns for bringing
additional investors into the scheme. These additional returns were called “commissions” and
allowed certain investors to realize returns significantly greater than 20%.
12.
The Debtor maintained several sales pitches for potential investors who cared
to ask how the Debtor could produce such incredible returns on a constant basis. The Debtor’s
primary explanation, not surprisingly, was opaque. To some investors, the Debtor explained that
he and/or his brother, Patrick Carney, had developed an investment plan from scratch. To other
investors, the Debtor stated that he had purchased software for penny stocks and modified it.
13.
The Debtor passed himself off as a “scalper,” a trader who never stayed in a
stock position longer than 15 minutes and always placed his orders on a stop-loss basis. The
Debtor explained that it was the brevity of his investments that spearheaded his entire operation
as he and his brother had developed an incredibly sophisticated software that let him know stock
price fluctuations before they actually occurred. Mr. Carney went so far as to tell investors that
his computer system allowed him to know exactly how a given stock was going to move a few
minutes before it actually happened. Once a given stock inevitably did what his computer
program told him it was going to do, the Debtor sold the stock and reaped the rewards of his
always timely investments. The Debtor also informed investors that he always sold his stocks
by the end of the trading day and did not hold stocks overnight, that way the money was always
safe. He told them that there was no chance of ever losing any money and that he had never lost
on any transaction; he made money whether the stock market went up or down.
14.
The Debtor’s entire “operations,” which began in his home, before moving to
an office located at 60 Turner Avenue, Elk Grove Village 60007, consisted entirely of a
computer station with several screens. The Debtor created bogus and poorly crafted monthly
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investor account statements on his computer to send to investors which purportedly showed that
the investors were making the incredible returns the Debtor had promised them.
15.
The Debtor’s representations were false as the Debtor was actually running a
Ponzi scheme in the purest sense. Whenever an investor would ask for a draw on his investment,
the Debtor would use the money of other investors to satisfy the Debtor’s obligation to the
redeeming investor.
At no time did the Debtor segregate one investor’s investment from
another’s. Instead, all the investors’ monies were co-mingled and distributed in a manner
determined by the Debtor that the Debtor believed would satisfy his investors enough to keep the
scheme going. All transfers made by the Debtor to an investor, whether that transfer constituted
a return of the investor’s principal or a return of the investor’s exorbitant “profit,” were made
from the investments of later investors. The Debtor made payments to investors in diverse
forms, ranging from payment by check from his bank accounts with Washington Mutual Bank,
N.A. and J.P. Morgan Chase Bank, N.A., to payment in straight cash delivered in bags and
envelopes. In some cases, an investor would come to the Debtor seeking payment and the
Debtor would oblige by literally pulling stacks of cash out of drawers.
16.
As Mr. Carney was paying off earlier investors with the investments of later
investors, Mr. Carney needed his Ponzi scheme to continue to grow because the scheme’s
survival depended on the Debtor’s ability to pay his investors the rate of return he had arbitrarily
promised them. And, for a time, the scope of the scheme increased exponentially through Mr.
Carney’s own efforts and word of mouth, as current investors sang praises of Mr. Carney’s
ability to turn out money at a high rate and as third parties took notice of the lavish spending of
some of the “successful” investors. In total, investors contributed approximately $20.5 million
and approximately 95% of that amount was simply paid to other investors.
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The investors in the Debtor’s Ponzi scheme at all times possessed claims
against the Debtor for the return of their principal investment, including various tort claims based
on fraud. The Debtor’s investors are creditors and their claims are liabilities.
18.
Given the nature of the Debtor’s scheme, the Debtor’s operation operated at a
loss from its inception. As the Debtor had no true assets and millions of dollars in liabilities, at
all relevant times the Debtor was insolvent, unable to pay his debts as they became due and
unreasonably capitalized due to the overwhelming amount of his liabilities.
19.
On October 8, 2008, the Illinois Attorney General’s Office, after being
informed that the Debtor was selling securities without a license, froze the various accounts of
the Debtor. Subsequently, the Illinois Secretary of State prohibited the Debtor from “rendering
investment advice and from offering or selling in or from this State.”
20.
In October 2009, the Illinois Attorney General’s Office indicted and arrested
the Debtor in DuPage County, asserting that the Debtor has committed the following crimes:
Theft over $500,000, Theft by deception over $500,000, Theft by unauthorized control over
$500,000, Securities Fraud, Wire Fraud, and Selling securities without registering.
21.
In or about March 2010, the Illinois Attorney General filed an indictment
against the Debtor in Cook County, Indictment NO. 10-cr-5591. The counts asserted by the
Illinois Attorney General against the Debtor in the Cook County indictment are similar in scope
and alleged malfeasance as the DuPage County Indictment.
22.
In the Cook County indictment, the Debtor pled guilty to theft, securities
fraud, and financial exploitation of an elderly person. As a result the Debtor is currently serving
an eight year sentence in Cook County jail.
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COUNT ONE
Avoidance and Recovery of Actual Fraudulent Transfers
Pursuant to §§ 548(a)(1)(A) and 550 of the Bankruptcy Code
23.
The Trustee repeats, realleges, and incorporates, as though fully set forth
herein, paragraphs 1 through 22.
24.
Within two years prior to the Petition Date, the Debtor transferred property in
the amount of $115,000.00 to the Defendant with the intent to hinder, delay, and defraud the
Debtor’s creditors and in furtherance of the fraud being perpetrated by the Debtor in connection
with his Ponzi scheme detailed above (the “Actual Fraudulent Transfers”). A schedule of the
Actual Fraudulent Transfers to the Defendant is attached as Exhibit A, and an account statement
created by the Debtor for the Defendant further demonstrating the Defendant’s investment with
the Debtor and the Actual Fraudulent Transfers received by the Defendant from the Debtor is
attached as Exhibit B.
25.
The Actual Fraudulent Transfers constituted transfers of the Debtor’s
property.
26.
The Actual Fraudulent Transfers were made, mediately or immediately, to or
for the benefit of the Defendant – an investor in the Debtor’s Ponzi scheme – and were made at
the request of the Defendant.
27.
The Actual Fraudulent Transfers may be avoided under § 548(a)(1)(a) of the
Bankruptcy Code.
28.
Defendant may have also received additional actual fraudulent transfers which
may be discovered during the discovery process.
29.
Pursuant to § 550(a) of the Bankruptcy Code, the amount of the Actual
Fraudulent Transfers may be recovered from Defendant.
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WHEREFORE, the Trustee respectfully requests pursuant to 11 U.S.C. § 548(a)(1)(a)
and 550 that the Court:
A.
Enter judgment in favor of the Trustee and against Defendant avoiding the Actual
Fraudulent Transfers;
B.
Enter judgment in favor of the Trustee and against Defendant in the amount of the
Actual Fraudulent Transfers, plus pre and post-judgment interest, fees and costs to the extent
provided by law; and
C.
Grant the Trustee such further and other relief as the Court may deem equitable
and just.
COUNT TWO
Avoidance and Recovery of Actual Fraudulent Transfers Pursuant to 740 ILCS 160/5(a)(1)
and 160/8(a), and §§ 544(b)(1) and 550(a) of the Bankruptcy Code
30.
The Trustee repeats, realleges, and incorporates, as though fully set forth
herein, paragraphs 1 through 22.
31.
Within two years prior to the Petition Date, the Debtor transferred property in
the amount of $115,000.00 to the Defendant with the actual intent to hinder, delay, or defraud the
Debtor’s creditors within the meaning of section 5 of the Illinois Uniform Fraudulent Transfer
Act (“UFTA”), 740 ILCS 160/1 et seq., and in furtherance of the fraud being perpetrated by the
Debtor in connection with his Ponzi scheme detailed above (the “UFTA Actual Fraudulent
Transfers”). A schedule of the UFTA Actual Fraudulent Transfers to the Defendant is attached
as Exhibit A, and an account statement created by the Debtor for the Defendant further
demonstrating the Defendant’s investment with the Debtor and the UFTA Actual Fraudulent
Transfers received by the Defendant from the Debtor is attached as Exhibit B.
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32.
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The UFTA Actual Fraudulent Transfers constituted transfers of the Debtor’s
property.
33.
The UFTA Actual Fraudulent Transfers were made, mediately or
immediately, to or for the benefit of the Defendant – an investor in the Debtor’s Ponzi scheme –
and were made at the request of the Defendant.
34.
Creditors of the Debtor exist that could avoid such UFTA Actual Fraudulent
Transfers, and could obtain further relief, pursuant to section 8(a) of the UFTA. Such creditors
could obtain a judgment against Defendant for the value of the UFTA Actual Fraudulent
Transfers as described in this Complaint, as either (1) the first transferee of the asset or the
person for whose benefit the UFTA Actual Fraudulent Transfers were made, or (2) a subsequent
transferee, pursuant to section 9(b) of the UFTA. By way of example, Natalie Walker, an
investor in the Debtor’s Ponzi scheme, is a creditor of the Debtor that could avoid the UFTA
Actual Fraudulent Transfers, and could obtain further relief, pursuant to section 8(a) of the
UFTA. Ms. Walker invested $7,200.00 with the Debtor’s Ponzi scheme, yet received no returns
of this investment from the Debtor. Therefore, Natalie Walker could obtain a judgment against
Defendant for the value of the UFTA Actual Fraudulent Transfers as described in this
Complaint, as either (1) the first transferee of the asset or the person for whose benefit the UFTA
Actual Fraudulent Transfers were made, or (2) a subsequent transferee, pursuant to section 9(b)
of the UFTA.
35.
Defendant may have also received additional actual fraudulent transfers which
may be discovered during the discovery process.
36.
The Trustee may avoid the UFTA Actual Fraudulent Transfers pursuant to
section 544(b)(1) of the Bankruptcy Code and may recover, for the benefit of the estate, each of
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the UFTA Actual Fraudulent Transfers, or their value, from Defendant, as either (1) the first
transferee of the asset or the person for whose benefit the UFTA Actual Fraudulent Transfers
were made, or (2) the immediate or mediate transferee of such initial transferee, pursuant to
section 550(a) of the Bankruptcy Code.
WHEREFORE, the Trustee respectfully requests pursuant to 740 ILCS 160/5(a)(1)
and 160/8(a), and §§ 544(b)(1) and 550(a) of the Bankruptcy Court that the Court:
A.
Enter judgment in favor of the Trustee and against Defendant avoiding the UFTA
Actual Fraudulent Transfers;
B.
Enter judgment in favor of the Trustee and against Defendant in the amount of the
UFTA Actual Fraudulent Transfers, plus pre and post-judgment interest, fees and costs to the
extent provided by law; and
C.
Grant the Trustee such further and other relief as the Court may deem equitable
and just.
COUNT THREE
Avoidance and Recovery of Constructive Fraudulent Transfer Pursuant to §§ 548(a)(1)(B)
and 550 of the Bankruptcy Code
37.
The Trustee repeats, realleges, and incorporates, as though fully set forth
herein, paragraphs 1 through 22.
38.
Within two years prior to the Petition Date, Defendant withdrew $115,000.00.
Defendant’s principal investment was $32,300.00. The difference, $82,700.00, is a fictitious
profit (the “Constructive Fraudulent Transfers”). A schedule of the Constructive Fraudulent
Transfers to the Defendant is attached as Exhibit A, and an account statement created by the
Debtor for the Defendant further demonstrating the Defendant’s investment with the Debtor and
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the Constructive Fraudulent Transfers received by the Defendant from the Debtor is attached as
Exhibit B.
39.
The Constructive Fraudulent Transfers constituted transfers of the Debtor’s
property.
40.
The Constructive Fraudulent Transfers were made, mediately or immediately,
to or for the benefit of Defendant – an investor in the Debtor’s Ponzi scheme – and were made at
the request of the Defendant.
41.
The Debtor was insolvent on the date that the Constructive Fraudulent
Transfers were made or became insolvent as a result of the Constructive Fraudulent Transfers.
42.
The Debtor was engaged in business or transactions, or was about to engage in
business or transactions, for which the property remaining with the Debtor after the Constructive
Fraudulent Transfers constituted unreasonably small capital.
43.
At the time of the Constructive Fraudulent Transfers, the Debtor intended to
incur, or believed that he would incur, debts that would be beyond his ability to pay as the debts
matured.
44.
The Debtor received less than a reasonably equivalent value in exchange for
the Constructive Fraudulent Transfers.
45.
Defendant may also have received additional constructive fraudulent transfers
which may be discovered during the discovery process.
46.
The Constructive Fraudulent Transfers may be avoided under § 548(a)(1)(b)
of the Bankruptcy Code.
47.
Pursuant to § 550(a) of the Bankruptcy Code, the amount of the Constructive
Fraudulent Transfers may be recovered from Defendant.
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COUNT FOUR
Avoidance and Recovery of Constructive Fraudulent Transfers Pursuant to 740 ILCS
160/5(a)(2), 160/6(a) and 160/8(a), and §§ 544(b)(1) and 550(a) of the Bankruptcy Code
48.
The Trustee repeats, realleges, and incorporates, as though fully set forth
herein, paragraphs 1 through 22.
49.
Within four years prior to the Petition Date, Defendant withdrew $115,000.00.
Defendant’s principal investment was $32,300.00. The difference, $82,700.00, is a fictitious
profit (the “UFTA Constructive Fraudulent Transfers”). A schedule of the UFTA Constructive
Fraudulent Transfers to the Defendant is attached as Exhibit A, and an account statement created
by the Debtor for the Defendant further demonstrating the Defendant’s investment with the
Debtor and the UFTA Constructive Fraudulent Transfers received by the Defendant from the
Debtor is attached as Exhibit B.
50.
The UFTA Constructive Fraudulent Transfers constituted transfers of the
Debtor’s property.
51.
The UFTA Constructive Fraudulent Transfers were made, mediately or
immediately, to or for the benefit of the Defendant – an investor in the Debtor’s Ponzi scheme –
and were made at the request of the Defendant.
52.
The Debtor was insolvent on the date that the UFTA Constructive Fraudulent
Transfers were made or became insolvent as a result of the UFTA Constructive Fraudulent
Transfers.
53.
The Debtor was engaged in business or transactions, or was about to engage in
business or transactions, for which the assets remaining with the Debtor after the UFTA
Constructive Fraudulent Transfers constituted unreasonably small capital in relation to the
business or transaction.
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54.
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At the time of the UFTA Constructive Fraudulent Transfers, the Debtor
intended to incur, or believed or reasonably should have believed that he would incur, debts that
would be beyond his ability to pay as the debts became due.
55.
The Debtor received less than a reasonably equivalent value in exchange of
the UFTA Constructive Fraudulent Transfers.
56.
Creditors of the Debtor exist that could avoid such UFTA Actual Fraudulent
Transfers, and could obtain further relief, pursuant to section 8(a) of the UFTA. Such creditors
could obtain a judgment against Defendant for the value of the UFTA Actual Fraudulent
Transfers as described in this Complaint, as either (1) the first transferee of the asset or the
person for whose benefit the UFTA Actual Fraudulent Transfers were made, or (2) a subsequent
transferee, pursuant to section 9(b) of the UFTA. By way of example, Natalie Walker, an
investor in the Debtor’s Ponzi scheme, is a creditor of the Debtor that could avoid the UFTA
Actual Fraudulent Transfers, and could obtain further relief, pursuant to section 8(a) of the
UFTA. Ms. Walker invested $7,200.00 with the Debtor’s Ponzi scheme, yet received no returns
of this investment from the Debtor. Therefore, Natalie Walker could obtain a judgment against
Defendant for the value of the UFTA Actual Fraudulent Transfers as described in this
Complaint, as either (1) the first transferee of the asset or the person for whose benefit the UFTA
Actual Fraudulent Transfers were made, or (2) a subsequent transferee, pursuant to section 9(b)
of the UFTA.
57.
Defendant may have also received additional constructive fraudulent transfers
which may be discovered during the discovery process.
58.
The Trustee may avoid the UFTA Constructive Fraudulent Transfers pursuant
to section 544(b)(1) of the Bankruptcy Code and may recover, for the benefit of the estate, each
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of the UFTA Constructive Fraudulent Transfers, or their value, from Defendant, as either (1) the
first transferee of the asset or the person for whose benefit the UFTA Constructive Fraudulent
Transfers were made, or (2) the immediate or mediate transferee of such initial transferee,
pursuant to section 550(a) of the Bankruptcy Code.
WHEREFORE, the Trustee respectfully requests pursuant to 740 ILCS 160/5(a)(2),
160/6(a) and 160/8(a), and §§ 544(b)(1) and 550(a) of the Bankruptcy Code that the Court:
A.
Enter judgment in favor of the Trustee and against Defendant avoiding the UFTA
Constructive Fraudulent Transfers;
B.
Enter judgment in favor of the Trustee and against Defendant in the amount of the
UFTA Constructive Fraudulent Transfers, plus pre and post-judgment interest, fees and costs to
the extent provided by law; and
C.
Grant the Trustee such further and other relief as the Court may deem equitable
and just.
COUNT FIVE
Disallowance of Claims
59.
The Trustee repeats, realleges, and incorporates, as though fully set forth
herein, paragraphs 1 through 58.
60.
Pursuant to § 502(d) of the Bankruptcy Code, the Court shall disallow any
claim of any entity from which property is recoverable under §§ 542, 543, 550 or 553 of the
Bankruptcy Code or that is a transferee of a transfer avoidable under §§ 552(f), 522(h), 544, 545,
547, 548, 549, or 724(a) of the Bankruptcy Code, unless such entity or transferee has paid the
amount, or turned over any such property, for which such entity or transferee is liable under
§§ 522(i), 542, 543, 550, or 553 of the Bankruptcy Code.
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Because Defendant has not turned over to the Trustee the Actual Fraudulent
Transfers, the UFTA Actual Fraudulent Transfers, the Constructive Fraudulent Transfers, or the
UFTA Constructive Fraudulent Transfers the Court must disallow under § 502(d) of the
Bankruptcy Code any claims of Defendant against the Debtor until Defendant pays to the Trustee
the value of such Actual Fraudulent Transfers, UFTA Actual Fraudulent Transfers, Constructive
Fraudulent Transfers, and UFTA Constructive Fraudulent Transfers.
WHEREFORE, the Trustee respectfully requests pursuant to 11 U.S.C. § 502(d) that the
Court:
A.
Disallow any claims of Defendant against the Debtor pursuant to § 502(d) of the
Bankruptcy Code; and
B.
Grant the Trustee such further and other relief as the Court may deem equitable
and just.
Dated: May 15, 2011
Respectfully submitted,
DAVID P. LEIBOWITZ, not individually but
as Chapter 7 Trustee for KEVIN G. CARNEY
By: /s/ Ronald R. Peterson
One of His Attorneys
Ronald R. Peterson (2188473)
Landon S. Raiford (6297473)
Lauren Sylvester Berheide (6304117)
JENNER & BLOCK LLP
353 North Clark Street
Chicago, Illinois 60654-3456
Telephone: (312) 222-9350
Facsimile: (312) 527-0484
Counsel for Chapter 7 Trustee
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