The U.S. Court of Appeals for the Seventh Circuit has upheld a court-appointed receiver’s decision to factor Ponzi scheme victims’ withdrawals into their compensation amounts.

On November 29, a unanimous panel affirmed a ruling regarding receiver Kevin Duff’s distribution of the last $1 million of $7 million in recovered funds.

All told, 118 investors lost $22.6 million as part of a Ponzi scheme run by William Huber of Decatur, Ill. The Seventh Circuit upheld Huber’s 20-year prison sentence in January.

Duff issued a report in December 2011 proposing the distribution plan at issue. He decided to allocate the $1 million to defrauded investors through the so-called “rising tide” method of allocating assets. In the rising tide method, an investor’s withdrawals from the Ponzi scheme are subtracted from the amount of the receivership assets he or she could have received without the withdrawals. The withdrawals are considered part of an investor’s distribution in this method. Duff noted that only 15 out of the 118 eligible investors objected.

Judge Ruben Castillo of the Northern District of Illinois approved the distribution plan in January Eleven investors appealed that ruling in February. The appellants preferred the net loss method, which gives each investor the same percentage of his or her loss.

Judge Richard Posner wrote the opinion in Merel v. Duff, joined by judges Michael Kanne and Diane Sykes.

Posner wrote, “Rising tide appears to be the method most commonly used (and judicially approved) for apportioning receivership assets.”

He rejected the appellants’ argument that the rising tide method penalizes them for withdrawing their money. He observed that they actually “withdrew portions of the commingled assets in the Ponzi schemer’s funds. Those were stolen moneys, albeit stolen in part from the eleven appellants.”

Posner continued, “When investors’ funds are commingled, none being traceable to a particular investor, no part of whatever funds are recovered is property of any investor. Instead each investor is a creditor, and has merely a claim to a share of the funds that is appropriate in light of the relative size of his investment and other relevant circumstances.” He concluded by noting that district courts have discretion to approve or disapprove receivers’ allocation schemes.

“The appellants have not shown that the district court abused its discretion, or indeed committed an error of any magnitude, in approving the use of the rising tide method to allocate compensation for losses caused investors by Huber’s fraud,” Posner wrote.

The appellants’ lawyer, Terry Grimm, a partner at Chicago’s Winston & Strawn, said he’s disappointed. “I think the rising tide is like victimizing a victim twice, but unfortunately it’s been upheld as a method of distributing funds recovered in a Ponzi scheme.”

Duff, who is also a partner at Chicago’s Rachlis Durham Duff Adler & Peel, said in an emailed statement that the decision is part of a growing body of case law about distribution methodologies for victims in Ponzi scheme cases: “[The] approach took into account funds that defrauded investors had already received from the Ponzi scheme operator during the course of his scheme in determining appropriate amounts to distribute to victims through the receivership. The decision should serve as a valuable precedent for district courts, receivers, and victims grappling with these issues in the future.”

Edwin Durham, a Rachlis Durham partner, argued for Duff at the Seventh Circuit.

Sheri Qualters can be contacted at