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Entries in CD (3)

Thursday
Sep132012

Former Stanford Chief Investment Officer Receives Three-Year Prison Sentence

The former chief investment officer of Allen Stanford's financial empire was sentenced to serve three years in prison after she pled guilty to obstructing an investigation by the Securities and Exchange Commission ("SEC") into Stanford's operations.  Laura Pendergest-Holt, 39, had agreed to plead guilty only days after Allen Stanford was sentenced to 110 years in prison after being convicted of operating a $7 billion Ponzi scheme rivaled only by Bernard Madoff.  The sentence is consistent with her plea agreement, in which prosecutors agreed to recommend a sentence of thirty-six months in prison followed by a term of supervised release.  It was unclear from immediate news reports whether United States District Judge David Hittner ordered Pendergest-Holt to pay restitution.  

The charges derived from the SEC's initial investigation into Stanford's operations, which resulted in the issuance of subpoenas to Stanford and another employee to provide testimony on the operations of Stanford International Bank, Ltd. ("SIB").  After the subpoenas were issued, a Stanford attorney convinced the SEC to allow the substitution of Pendergest-Holt to give testimony, intimating that she was more familiar with operations than Stanford.  Pendergest-Holt then participated in several weeks of meetings with Stanford executives where she was coached on the testimony she was expected to give.  Her testimony omitted crucial details of SIB's finances and omitted or misrepresented other relevant information.  According to prosecutors,

"Holt acknowledged that her eventual appearance and sworn testimony before the SEC was a stall tactic designed to frustrate the SEC's efforts to obtain important information about SIB's investment portfolio.  Holt admitted she took this action intentionally and corruptly, knowing that her testimony would impede the SEC's investigation and help SIB continue operating."

Holt is the third-highest ranking official to receive prison time after Stanford and Stanford's CFO, James Davis.  Incidentally, Pendergest-Holt carried on an affair with Davis, who served as the prosecution's chief witness against Stanford.  Two other Stanford officials are scheduled to stand trial beginning later this month.  

A copy of the indictment is here.

Monday
Sep122011

Stanford Investors: Receiver Can't Prove Stanford Operated Ponzi Scheme

A group of investors sued by the court-appointed receiver of R. Allen Stanford's alleged Ponzi scheme has filed their opposition to an attempt to have a judicial declaration that Stanford's scheme was, in fact, a Ponzi scheme.  Receiver Ralph Janvey had filed a motion for summary judgment seeking the determination that Stanford's purported operation of selling certificates of deposit ("CD's") to investors was nothing more than an elaborate Ponzi scheme.  Such a move would not only provide the first judicial decree that Stanford's operation was a Ponzi scheme, but would also serve the added effect of bolstering Janvey's campaign to recover interest payments made to investors as fraudulent transfers.  Without a judicial declaration, either civil or criminal, investors finding themselves targets of Janvey's suits have incentive to contest the issue, ultimately forcing the receiver to expend more time to the suits.  Already, at least one investor has taken issue with Janvey's fees and sought an investigation.  

The importance of Janvey's quest to have a judicial stamp of approval that Stanford operated a Ponzi scheme lies in the legal basis under which Janvey is proceeding.  Janvey seeks to recover interest payments paid to purchasers of Stanford-issued CD's, arguing that he is entitled to these fraudulent transfers under the Uniform Fraudulent Transfer Act ("UFTA").  Under the UFTA, a transfer is fraudulent if (1) the transferor either made the transfer with actual intent to hinder or defraud, or (2) the transfer was constructively fraudulent.  Proceeding under the latter theory requires that the debtor does not receive "reasonably equivalent value" in return for the transfer.  Courts have found this to occur when either the debtor is insolvent at the time of transfer, or after the transfer is left with insufficient capital to continue the business.  

To recap, a fraudulent transfer is recoverable under the UFTA when the debtor either had actual intent to defraud or the transfer was constructively fraudulent.  However, the evolving Ponzi scheme caselaw has yielded several important conclusions in this area. First, the establishment of the existence of a Ponzi scheme is sufficient to prove a debtor's intent to defraud.  In re McCarn’s Allstate Finance, Inc., 326 B.R. 843, 850 (Bankr. M.D. Fla. 2003).  This conclusion provides the 'actual intent' requirement of UFTA.  Additionally, courts have also concluded that an established Ponzi scheme is effectively insolvent at inception, thus preventing a transferee from claiming they received reasonably equivalent value.  Thus, the judicial declaration that Janvey seeks would in essence remove any bargaining chips victims may have in opposing such a clawback suit.  As observed by the Court in McCarn's Allstate Finance, the establishment of a Ponzi scheme effectively ends the Receiver's duty:

Once it is established that the Investors’funds were transferred by Debtor as part of a Ponzi scheme, the Trustee has met her burden with respect to avoiding those transfers so long as they were made within either the [look-back periods contained in the Bankruptcy Code or state law].

Not surprisingly, the victims opposing Janvey's motion for summary judgment make arguments that (1) the interest payments were received in good faith, and (2) the investors exchanged reasonably equivalent value.  The victims seek to distinguish the caselaw cited by Stanford, arguing that unlike those cases, the payment of interest according to the CDs were contractual payments made according to contractual liability - not merely promises of regular returns as seen in other Ponzi schemes.  In support, the victims cite a 2002 Connecticut federal case in which dollar-for-dollar forgiveness of contractual debt in satisfaction of an antecedent debt was determined to be reasonably equivalent value.  In re Carrozzella & Richardson, 286 B.R. 480, 490-91 (D. Conn. 2002).  The victims also attack the strict standard of proof required for Janvey's request, alleging that the evidence raises numerous genuine issues of fact that prevent summary judgment.

Under the federal rules of civil procedure, Janvey is entitled to file a reply to the victim's response.  

A Copy of the Investor's Opposition to Janvey's Motion for Summary Judgment is here.

Sunday
Sep112011

Arizona Man Indicted in $6.3 Million Ponzi Scheme

A Phoenix man was charged with sixty-seven felonies in what authorities allege was a Ponzi scheme that defrauded investors out of over $6 million.  Jeffrey Paul Navin, 52, of Phoenix, was accused of selling fraudulent certificates of deposit to senior citizen investors, falsely representing that the CD's were FDIC insured.  He was charged with forty-five counts of mail fraud, eight counts of false personation, and fourteen counts of money laundering.  Both wire fraud and money laundering carry a maximum prison sentence of twenty years per offense, while false personation carries a maximum sentence of three years per offense.  

Navin created or used a multitude of entities to market fictitious CD's to potential investors, including BankNet, Nationwide Banknet Services, Capital One Custodial Services, and WWI, Inc.  Navin also claimed that he was a licensed FDIC Broker and that the CD's were FDIC-insured.  At least seventeen investors placed money with Navin, with each losing at least $125,000.  In total, Navin collected $6.3 million from investors who thought they were purchasing government-insured securities.  Instead, authorities allege that Navin did not purchase a single CD, and that neither Navin nor the CD's were FDIC-insured.  Investors were provided with fictitious account documents, and Navin used the majority of investor funds for personal expenses and to make Ponzi-like payments to victims for interest and return of principle.

In addition to the criminal charges, authorities are seeking the forfeiture of any property traceable to Nevin's scheme.  According to court documents, Navin was released on his own recognizance and ordered to surrender his passport during the pendency of criminal proceedings.  

A Copy of the Indictment is here.