The USFIA Receiver has approved $45.2 million in victim claims from the alleged pyramid scheme, according to figures released November 9th. This amount covers claims directly related to USFIA operations.
As of that date, $15.3 million in claims were rejected, and another $11.1 million were dismissed as duplicates. These statistics were detailed in the Receiver's Twentieth Interim Report, which covered the second quarter of 2020. The report outlined the ongoing process of evaluating financial losses for thousands of individuals.
When factoring in claims associated with related entities tied to USFIA founder Steve Chen, the total allowed victim claims climb to $80.4 million. Correspondingly, $53.7 million in claims across these same entities were disallowed by the Receiver. This broader scope reflects the interconnected financial web Chen allegedly created.
The Receivership currently holds $63.8 million in assets, as recorded on June 30th, 2020. This substantial sum is intended for distribution to victims.
But a significant complication has emerged. The Receiver's Forensic Accounting Report, recently filed, now forms the basis for preparing income tax returns for the pre-receivership tax periods. This analysis indicates the Receivership Entities face substantial potential income tax liabilities.
Under federal law, a receiver can incur personal liability to the Internal Revenue Service if assets are distributed to claimants before outstanding federal tax debts are satisfied. This is not a hypothetical risk for the USFIA Receiver; it represents a real and direct exposure that must be addressed before any victim payouts can begin.
The Receiver contends that any tax claims from the IRS and the California Franchise Tax Board should be subordinated. This means investor claims would take precedence over government tax claims, ensuring victims receive their compensation first. The argument rests on the principle that the "income" generated by a fraudulent scheme like USFIA was not legitimate business profit subject to standard taxation.
This exact scenario played out in the TelexFree pyramid scheme case. The IRS initially asserted a $429 million claim against the TelexFree receivership, which threatened to severely diminish victim distributions. After extensive negotiations, the IRS drastically reduced its claim, ultimately allowing victim payouts to proceed.
A similar resolution is anticipated for USFIA, given the legal precedent set by TelexFree and other major Ponzi scheme cases. However, such agreements require negotiation and are not guaranteed, leaving the timing of distributions uncertain.
The Receiver is currently preparing a motion to approve objections to claims and to establish a Plan of Distribution. This formal legal process will outline how the remaining funds will be allocated among approved victims. The resolution of the federal and state tax situation remains a critical prerequisite for any distributions.
Until the tax authorities agree to subordinate their claims or a settlement is reached, the $63.8 million remains held by the Receivership. The court-appointed Receiver continues discussions with the IRS and the California Franchise Tax Board to navigate this complex financial and legal hurdle.