Stetson University instructor Susan Zucker already was reeling after her family lost $56,000 in the implosion of a $300 million Ponzi scheme orchestrated by former Orlando boy band producer Lou Pearlman.
Now, two years later, Zucker and others feel victimized a second time by the attorney they thought was fighting for them.
Soneet Kapila, the court-appointed trustee in Pearlman's bankruptcy case, has filed more than 600 so-called clawback suits on behalf of bilked investors. He is seeking to get back millions that were withdrawn from Pearlman's Trans Continental Airlines investment fund between 2003 and 2007.
In Zucker's case, Kapila wants her to return $75,000 of her own principal that she withdrew in 2006. She said she never took a penny of profit out of the account and even lost that $75,000 withdrawal on an equally ill-fated real estate investment in Naples. The clawback suit came as a shock. "I'm not a crier, but I started crying," Zucker said.
Clawback suits and Ponzi frauds go hand-in-hand. The trustee in Bernie Madoff's $50 billion pyramid scheme and the receiver handling Florida hedge fund manager Arthur Nadel's case have both turned to clawbacks to recoup lost funds on behalf of victims. But they're targeting "false profits," not withdrawn principal.
Kapila is under fire for extending clawbacks far beyond profiteers. He's suing investors who thought they were investing in an FDIC-insured retirement tool from Pearlman and lost millions. Moreover, much of the money recovered from the clawbacks is expected to go toward unpaid legal expenses before burned investors.
Zucker's husband, USF business professor Alan Balfour, thinks the trustee's motives are strictly mercenary: "It looks to all the world that this is a veiled attempt on their part to recover enough money to cover their legal fees because they haven't recovered enough from Pearlman to break even on this."
Jim Lowy, a Tampa lawyer representing more than 30 clawback defendants, estimates that roughly one out of every three creditors in the bankruptcy case is being sued.
"These are classic shotgun proceedings," Lowy said. "I don't believe more than 5 percent of the cases they have filed have any merit. … It's attorney welfare, that's what it is."
Kapila says he's only doing his job.
He said he has a statutory obligation to retrieve as much money as possible that was withdrawn out of Pearlman's fraudulent accounts so that it can be divvied up equally to all burned investors.
"We're suing people who the records show got a benefit (to help) some people who did not receive the same benefit," Kapila said in an interview with the Times. "It's a business decision I had to make as to which ones were economical to sue."
With the clock ticking on a two-year deadline to file clawbacks, Kapila and a team of attorneys affiliated with him are casting a wide net:
• He sued the University of Tampa to retrieve $19,000 that Pearlman paid in tuition for a student who appeared in the Pearlman-produced movie Longshots.
• He sued Pearlman's deceased aunt, who was also singer Art Garfunkel's mother, seeking $127,000
• He sued a wide array of banks; a Clearwater real estate agency; a jeweler in Texas; and one of the biggest sellers of the scam investment in the bay area, Golden Security.
And he sued Paula Rosen, a 70-year-old widow in Delray Beach who is living off Social Security after her entire $750,000 nest egg, representing her IRA, her deceased husband's IRA and money from selling their house, was lost in the Ponzi scheme.
For years, Rosen considered her account with Pearlman as her retirement fund, taking out $3,000 a month to pay expenses. She's being sued to pay back $200,000.
Rosen says she can't afford to hire an attorney, let alone pay the trustee. She filed a response to the court on her own.
"How they can get away with this, I'll never know," she said. "I think it's all gravy for the trustee and lawyers. … It's like being raped twice."
Kapila declined to discuss individual cases, but said, "If I did not believe there was merit to the case, I would not have filed the lawsuit."
Pearlman is serving a 25-year sentence in a U.S. penitentiary in Atlanta. He pleaded guilty a year ago to bilking investors of $300 million, funds that vanished to bankroll Pearlman's extravagant lifestyle and pay early investors to keep the Ponzi scheme churning.
So far, attorneys say, only about $5 million has been recovered, largely through auctioning Pearlman's possessions. A chunk of the recovered funds has already been allocated to attorneys.
Kapila and numerous affiliated attorneys who filed the clawback cases on a contingency fee have yet to be reimbursed for more than half their expenses.
But Kapila says he is thinking of the victims.
"It is not our goal to bring in litigation with the mere purpose of trying to pay professionals, and we will respect the judgment of the court when the court evaluates the professional fees incurred," he said.
Under bankruptcy law, trustees are given wide leeway in seeking to recoup funds. Some court cases have held that each individual redemption payment out of a fraudulent fund could be deemed a fraudulent transfer that hinders, delays or defrauds the actions of other investors.
Trustees like Kapila can seek to claw back both false profit and principal. But investors could prevail in court if they show they redeemed a transfer "in good faith" and for value.
That's the sticky point here.
"From my experience as a lawyer in Ponzi fraud cases, it's highly unusual to be suing the third-party victims," said Orlando lawyer Roy Kobert, who is representing at least 50 of the clawback cases. "These are people who didn't know and shouldn't have known it was a fraud."
One defendant that Kobert represents, a retired engineering professor who had fled Saddam Hussein's regime in Iraq, pulled out $20,000 in principal. He's being sued to return the money. "He didn't understand how this could happen to him here in America," Kobert said.
Michael Connelly, a former member of the creditors committee in the Pearlman bankruptcy, said he has been besieged by calls from desperate investors. Some of them are already suffering "extreme health and financial stress" and worry how they'll afford attorneys to defend themselves.
Some people who were scammed by Pearlman bought stock, expecting to get in on a stock offering and earn hefty dividends in the meantime. Most investors thought they were getting a safe, FDIC-insured high-yield savings account to park their retirement money. Sellers called it an "Employee Investment Savings Account" offered through Pearlman's Trans Continental Airlines.
They were lured in by smooth sales pitches, by a fake insurance certificate purportedly from Lloyd's of London and by a rosy Dun & Bradstreet report based on false financials. Like any successful Ponzi scheme, as enough new money came in to pay off withdrawals by old investors, there was no indication of a problem.
That was the scenario for retired New Port Richey veterinarian Ted Lowenberg. He noticed an ad in the St. Petersburg Times for what seemed like an FDIC-insured investment offering a return of 6 percent plus.
He made a $50,000 investment and withdrew the whole amount a year later, plus $3,200 in interest. After the Ponzi scheme was exposed, he considered himself one of the fortunate unscathed — until he received a clawback summons seeking payback of the $53,200, plus additional interest and court costs.
"It was just out of the blue," Lowenberg said. "They want their pound of flesh and you have to defend yourself. If you don't, they're going to take it."
He understands seeking the interest he received, but coughing back his own principal investment "seems pretty stiff."
Many of the most entrenched investors were relatives or acquaintances of Pearlman.
Paula Rosen has known Pearlman since he was 19, living in Flushing, N.Y. He tutored her son in math. His mom was the milk lady at her kids' school.
"He was like a son," Rosen said. All her family invested with him for decades, putting more in every time they had a little extra money. "This was the shock of my life. It's hard to believe that we could be that dumb … but Dun & Bradstreet always gave him a great rating."
She blames government regulators for ignoring red flags in Pearlman's empire and keeping investors like herself in the dark until it was too late.
In February 2007, after Pearlman had already fled the country, three of his companies were forced into bankruptcy with others to follow.
The initial bankruptcy trustee, Jerry McHale, had a relatively brief tenure. Kapila took over a month later.
A Fort Lauderdale CPA, Kapila already had extensive experience with fraud investigations and Ponzi schemes, including a couple of other big Ponzi schemes: Prime Capital Corp. and Financial Federated.
But Kapila acknowledged early on that the Pearlman case presented a mammoth challenge. As he sifted through 1,500 boxes of documents Pearlman left behind when he fled, Kapila described the case as "a huge jigsaw puzzle."
It took many months for the pieces to fall into place, determining how money was pulled out of Pearlman's various bank accounts and where it went.
Asked last week if he felt conflicted in suing bilked investors whom he is charged with representing, Kapila referred to the bigger picture: trying to help all victims equally.
"It is difficult in the sense that it is not being done out of trying to derive pleasure out of it," he said. "I'm very sensitive and sympathetic to the pain caused by Lou Pearlman to a lot of investors."