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Originally published Saturday, April 28, 2012 at 8:00 PM

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Meridian Ponzi's 'winners' pursued; ClearSign IPO and the JOBS Act; shoes sport Buffett's image

The trustee unwinding the Meridian Mortgage funds Ponzi scheme sent clawback letters demanding that some investors return money they withdrew before the funds' collapse.

By Rami Grunbaum, deputy business editor, and Times staff

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The long arm of bankruptcy law is reaching out to 182 investors in Frederick Darren Berg's Ponzi scheme at Meridian Mortgage who may have thought themselves lucky or smart: They got out more money than they put in.

In what's known as a clawback, the trustee liquidating Meridian assets is demanding they return the excess funds so the money can be redistributed among hundreds of losing investors.

"We're only going after the net winners," said trustee Mark Calvert, who expects to collect as much as $10 million in "fictitious interest" paid to those 182.

This past week, those "net winners" in what prosecutors called the largest Ponzi scheme in state history received letters from Calvert demanding that they return all Meridian payouts beyond the capital they invested, going as far back as 2004.

"It appears that you were an unintended beneficiary of Berg's fraud," the letter says. "The moneys the Meridian funds paid to you were not generated by legitimate activity, but were stolen from new investors that were lured into the funds."

In 50 cases where investors received large payouts starting in 2009, when Berg's Ponzi scheme began to unravel, Calvert is requiring they fill out detailed questionnaires — under oath — about what they knew and when they knew it.

Investors who benefited from inside knowledge of the impending collapse could be sued to collect all money they were paid from Meridian, including their principal, Calvert said.

"What we're trying to do is level the playing field" so some investors don't enjoy preferential treatment, he said.

One investor targeted by Calvert said he certainly doesn't feel like a winner. He withdrew about half the balance showing in his account four or five months before Berg announced in August 2009 that he was suspending all Meridian payouts, this investor said, speaking on condition of anonymity. There was approximately $200,000 left, and that money is lost.

But the demand letter seeks tens of thousands of dollars paid out beyond his initial investment, which the trustee classifies as a net gain.

"What isn't very clear is where I get the money," said the investor. "I'm not going to write a check right away." But he acknowledged that "there's certainly room for negotiation."

Another investor said he understands the trustee's claim and feels OK about sharing the pain of Meridian's losers.

Calvert's letter says he'd be entitled to claw back all they collected, but except for those 50 late winners, all he's asking is the "fictitious interest" they got. Those who don't quickly agree will be sued for the entire amount, he warned; to minimize the expense he plans to incorporate them into one lawsuit.

"We're not in the business of litigation. We're only going to sue those people who aren't reasonable about returning interest," said Calvert's attorney, Michael Gearin.

Berg pleaded guilty to wire fraud, money laundering and bankruptcy fraud and was sentenced in February to 18 years in prison. He admitted that beginning in 2003 he diverted tens of millions of dollars from Meridian's mortgage-investment funds to finance a luxury bus firm and his own lavish lifestyle, and operated a Ponzi scheme to cover up that fraud.

According to Calvert, Meridian paid out more than $2 million to certain investors from March through June 2009, just before shutting the window on withdrawals. The trustee wouldn't say how much of the $7 million distributed by Meridian from the start of 2009 he expects to collect, or whether he has information suggesting any investors were tipped off to pull money out.

Clawbacks from "net winners" in a Ponzi scheme are well established — and famous, thanks to the Bernie Madoff case. But some legal scholars have questioned whether they are fair and legally well-grounded.

Amy Sepinwall, who teaches in the Department of Legal Studies and Business Ethics at University of Pennsylvania's Wharton School, wrote in a paper published last month that "there is no area of law outside of the bankruptcy context in which innocent investors are made to return profits they earned as a result of the wrongful conduct of the corporations or brokerage firms in which they invested."

She argues it would be more equitable for Ponzi scheme victims to be repaid from some kind of broader compensation system, perhaps like the insurance that protects stock investors when their brokerage fails.

There is no such system, however. As trustee, said Calvert, "This is part of my fiduciary duty and I will do it, and do it aggressively."

ClearSign IPO

and the JOBS Act

This past week Seattle-based ClearSign Combustion apparently became the first newly public company to claim exemption under the new "Jumpstart Our Business Startups Act," or JOBS Act.

The law, intended to make it easier for entrepreneurs to raise money, allows so-called "emerging growth companies" to avoid a slew of Securities and Exchange Commission (SEC) disclosure rules on finances, executive compensation and the like.

But ClearSign hadn't even planned on using the JOBS Act, CEO Richard Rutkowski said after the IPO Wednesday. In fact, he said, it was the SEC's idea.

ClearSign, which is developing technologies to improve the efficiency of boilers, furnaces, turbines and other combustion systems, registered to go public in November, before the JOBS Act began moving through Congress like grease through a goose.

The SEC was about to declare ClearSign's registration effective — "it was literally the 11 ½th hour," Rutkowski said — when the agency asked if the company wanted to claim any exemptions under the JOBS Act, which had become law about three weeks earlier.

"Basically the choice was, do we want to be more regulated or less regulated?" Rutkowski said. "Not being masochists, we said less regulated."

The company said in its filing it might take advantage of many of the new law's exemptions, but that it would delay complying with new or revised accounting standards.

The SEC insisted that ClearSign make a firm choice on the accounting exemption, Rutkowksi said.

Rutkowksi, who's been in leadership roles in publicly traded tech companies for almost two decades, called the JOBS Act "an interesting mixed bag."

While a few of its provisions may go too far, he said, overall the law should help companies find new sources of capital. More early-stage companies, like ClearSign, may take their chances in the public markets rather than seek venture funding.

He downplayed concerns that the law's looser rules could create a bull market in sketchy stock offerings and outright frauds.

Many of the notorious flameouts of the dot-com era, Rutkowksi said, were brought to market by venture capitalists and esteemed investment banks.

"People need to be protected, but the danger is that they'll start to rely on that protection instead of doing their due diligence," he said.

"Before you make an investment, you need to do your homework or have someone you trust do it for you."

As for ClearSign, Rutkowski said its technology target is for first commercialization in 18 to 30 months, "but there'll be a lot of value-adding milestones between now and then."

— Drew DeSilver, ddesilver@seattletimes.com

Shoes sport

Buffett's image

Want to have Warren Buffett at your feet? Bothell-based shoe designer Brooks Sports has produced a limited run of footwear bearing the Sage of Omaha's likeness, The New York Times' DealBook blog reports.

About 4,000 pairs will be offered at this week's Berkshire Hathaway annual shareholders meeting, at $110 each.

"The insoles of a new Adrenaline GTS running shoe feature a cartoon version of Mr. Buffett, in a running suit and headband, his arms raised in victory as he breaks through a finish line," DealBook wrote. "The shoe's tongue features Berkshire's stock symbol, BRK."

Brooks, of course, is owned by Berkshire Hathaway.

The running-shoe specialist has been working to raise its profile within the company and outside. Locally, it plans to be the main tenant of a proposed "deep green" office building in Seattle, at the foot of Stone Way North.

Comments? Send them

to Rami Grunbaum:

rgrunbaum@seattletimes.com

or 206-464-8541.

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