“Unadulterated greed,” is how a federal agent described the conduct of convicted felon, Frederick Darren Berg. Berg recently made headlines again when he escaped from prison after serving only a few years of his 18- year sentence. Berg’s classic Ponzi scheme led to felony charges including wire fraud, money laundering and bankruptcy fraud in Washington State. Here’s Berg’s fraud and greed by the numbers:

  • Over 700 investors defrauded through 10 investment funds
  • $245 million bilked over eight years
  • Two public accounting firms reviewed the funds or company financials as an on-going entity
  • At least two wealth advisors recommended the funds to their clients
  • Berg owned four houses, two Lear jets and two yachts
  • At age 49, Berg was sentenced to 18 years

Ponzi scheme. How to recover investment money and damages from Darren Berg’s fraud, breach of contract and breach of fiduciary duty actions creates a giant puzzle for any good commercial lawyer. In its simplest form, Berg established investor funds to ostensibly purchase real estate mortgages and make real estate loans. Investors were touted 10 percent and more earnings. And, many investors for a few years received substantial interest payments. Like any good Ponzi scheme, Berg established a fan base of investors to showcase his funds’ success. The earlier investors were paid in part by investments, but then by subsequent investors’ deposits into the funds. All the while, Berg was draining the funds. The details of Berg’s fraudulent schemes are outlined in articles from Patrick Pretty and the Seattle Times .

Bankruptcy. As the Ponzi scheme started to unravel, Berg took advantage of personal and commercial bankruptcy laws, making it more difficult for investors to recoup losses through commercial litigation. As is usually the case, investors didn’t have liens on assets or a personal guarantee from Berg. So, the investors were at the bottom of the list of people to get any money back. However, a few investors did pursue commercial litigation outside the bankruptcy court. While their claims under Washington’s Security Act were deemed to belong to the bankruptcy trustee, the court held that a fact question remained as to whether the common law claims of negligence, negligent misrepresentation and breach of fiduciary duty were assigned to the trustee. In other words, the investors might be able to recover money from financial advisors and assets independent of the bankruptcy. For details, check out the federal court’s opinion .

Lessons Learned. What can you do to avoid losing your hard earned money to people like Berg? First, know that Ponzi schemes have been around for centuries, and will continue to plague investors—even savvy investors. So, start with being aware that people like Berg exist and aren’t easy to spot. In fact, if you want to see Berg in action, check out YouTube video produced after things were heating up and Berg was still hunting for investors. Berg describes his fund activities as “meat and potatoes,” and describes what keeps him up at night, including people wanting to cash out of the funds due to “bad news on the doorstep” like Bernie Madoff.

  • Do your research. Berg’s career was plagued with 20 years of questionable activity. He lied about his education. How did he get people to ignore these facts? Deception. He was golfing buddies with financial advisors and investors. He did actually pay some of the initial investors so he would have happy clients to sing his praises. Question how your advisor knows Berg.
  • Use the smell test. In Berg’s case, he actually had a public accounting firm audit a few funds. That sounds great, but it’s only one piece of information. How many similar funds get the same results as the investment fund you are reviewing? Don’t rely on one data point.
  • Keep yourself honest. Know when things start to feel wrong, consult financial experts and attorneys. Consult someone other than the person who first introduced you into the opportunity. Berg got extra cover in his scheme in 2009 due to economic pressures. But there were signs of problems then. Don’t leave your investment without continuing to verify your results.

Seek Professional Advice Early. As soon as you think there’s a problem, seek the advice of a commercial attorney with a history in breach of contract and fraud cases.

  • Bankruptcy. If you first get notice of a problem with the bankruptcy notice, don’t just throw up your hands and put your faith in the bankruptcy trustee. While the trustee is going to control the bulk of assets and legal activities, there may be other commercial litigation avenues to pursue. What about your financial advisor, the public accounting firm that certified funds and causes of action that may not fall within the bankruptcy court?
  • Is the money you did receive really yours? Another item highlighted by Berg’s bankruptcy petition, was the ability of the trustee to take investor payments received. Investors who have actually received payments from the company or person in bankruptcy, beware. The trustee may come after the money.

Thankfully, most of us will only encounter a Darren Berg character in works of fiction. But if you do find yourself with questions regarding a commercial litigation matter, we are here to help.