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Federal Trade Commission v. Andersons (Ponzi Scheme)

Hale Stewart

High net worth individuals are loathe to transfer assets to any entity over which they have no control. This fact creates an unresolvable problem when forming an offshore asset protection trust: so long as a U.S. person can exert even a modicum of control over a foreign entity, a U.S. court has sufficient grounds to rule that a U.S. based debtor can repatriate assets. More importantly, failure to comply with a repatriation order could lead to contempt citation against the U.S. debtor. The facts of Federal Trade Commission v. Affordable Media[1] typify this problem.

In 1995, the Andersons formed a Cook Island asset protection trust that had the following three features:

  • The Andersons were co-trustees, giving them power over the trust corpus
  • The trust document contained an anti-duress clause. The power is triggered when a court places a person (usually a U.S. based grantor) under “duress,” which usually occurs when a judge threatens a U.S. person with civil contempt. A duress clause gives one party (here the other co-trustee) the power to remove another party (here, the Andersons) when the duress event occurs.
  • The Andersons were named as trust protectors. One of the affirmative powers granted to the protectors was the ability to remove a trustee.

In 1997, the Andersons formed and ran a late-night television Ponzi scheme, which the Federal Trade Commission began attacking one year later. One of the FTC’s first actions was to obtain a temporary injunction against the Andersons, which included a demand that the couple repatriate foreign funds. The Andersons attempted to comply, asking their co-trustee to disgorge assets. However, the co-trustee did not comply. Instead, it determined that the court order was a “duress event,” leading them to remove the Andersons as co-trustees. The couple then told the court they tried to comply with the court’s order, but couldn’t.

The preceding paragraph contains a picture-perfect fact pattern explaining the purpose of anti-duress clauses. Asset protection planners add these clauses to foreign trust documents, hoping they will be sufficient to blunt a domestic court’s contempt powers;

Another common issue is whether the client may someday be in the awkward position of either having to repatriate assets or else be held in contempt of court. A well-drafted asset protection trust would, under such a circumstance, make it impossible for the client to repatriate assets held by the trust. Impossibility of performance is a complete defense to a civil contempt charge.[2]

This excerpt perfectly describes what the Andersons did.

The court treated the Anderson’s actions more as Kabuki Theater than a serious attempt to follow their repatriation instructions. They first noted, “Foreign trusts are often designed to assist the settlor in avoiding being held in contempt of a domestic court while only feigning compliance with the court’s orders.”[3] The court then continued,

With foreign laws designed to frustrate the operation of domestic courts and foreign trustees acting in concert with domestic persons to thwart the United States courts, the domestic courts will have to be especially chary of accepting a defendant’s assertions that repatriation or other compliance with a court’s order concerning a foreign trust is impossible. Consequently, the burden on the defendant of proving impossibility as a defense to a contempt charge will be especially high.[4]

This cite is especially damning to the asset protection planning community. In no uncertain terms, the court is clearly informing planners that judges view duress clauses as illusory concepts devoid of legal substance because they allow a U.S. debtor to feign compliance with a court order, all the while knowing that their actions are meaningless. Although courts must give duress clauses some weight, they will also apply an “especially high” compliance requirement on U.S. debtors who attempt to use them.

The court also ruled that because the Andersons were trust protectors, they could remove the trustee and replace them with a more malleable alternative. This was sufficient justification for the court to rule the couple was in contempt, despite their “attempt” to repatriate assets from the Cook Islands.

In addition to greatly limiting the efficacy of duress clauses, this case also stands for the proposition that so long as a U.S. debtor can exert any influence over an offshore trust — even if remotely tangential – the court has grounds to rule against the debtor. This creates a large problem for planners, because no U.S. individual will place his assets into an offshore entity without retaining control. But that control will eventually prove fatal should a court rule the grantor is in contempt of court.

[1] Federal Trade Commission v. Affordable Media, 179 F.3d 1228 (9th Cir. 1999)
[2] Id at 1241
[3] Id
[4] Id


Mr. Stewart has a masters in both domestic (US) and international taxation from the Thomas Jefferson School of Law where he graduated magna cum laude. Is currently working on his doctoral dissertation. He has written a book titled US Captive Insurance Law, which is the leading text in this area.

He forms and manages captive insurance companies and helps clients in international tax matters, US entity structuring, estate planning and asset protection.