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Entries in stanford (10)

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.

Thursday
Nov242011

Congress: SIPC Needs to Decide Whether it Will Provide Coverage to Victims of Stanford Ponzi Scheme

Nearly six months after the Securities and Exchange Commission ("SEC") issued a formal request to the Securities Investor Protection Corporation ("SIPC") for coverage of losses suffered by victims of R. Allen Stanford's $7 billion Ponzi scheme, investors are still waiting to hear whether SIPC will heed the SEC's request and begin proceedings to return some or all of investor losses.  The SEC made findings in a report released in mid-June that Stanford's broker-dealer, Stanford Group Company ("SGC"), had failed to meet its obligations to customers, and as a result of its membership in SIPC, was the proper subject of a customer protection liquidation and thus entitled to compensation from SIPC.  Should SIPC fail to take appropriate action, warned the SEC in a thinly-veiled directive, the SEC Division of Enforcement was prepared to institute legal action against SIPC to compel such a proceeding.  With no decision yet issued, pressure has continued to mount on SIPC from several fronts, and a recent letter from Congress has demanded a "satisfactory update" or decision on the matter by December 15.

The Securities Investor Protection Act of 1970 ("SIPA") mandated the creation of SIPC, which it saw as a way to allay investor fears and save the securities market in a time of crisis.  While the creature of congressional legislation, SIPC is unique in that it is funded through membership fees paid by member institutions, which by statute are all persons registered as broker-dealers under Section 15(b) of the Securities Exchange Act of 1934.  From 1996 until 2009, these member assessments were pegged at $150 per institution - regardless of the size of the firm's securities business.  Thus, financial titans such as Goldman Sachs or JP Morgan paid $150 to sustain a fund used in the event of financial collapse.  However, after the recent financial crisis, SIPC bylaws were adjusted as of April 1, 2009 to peg member assessments as the greater of $150 or ¼ of 1% of net operating revenues from the securities business.  The $150 minimum requirement was later eliminated upon the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act in July 2010.  Firms such as Goldman and JPM, whose securities businesses generate tens of billions of dollars in annual revenues, now face SIPC membership fees in excess of tens of millions of dollars.

When a member broker-dealer fails, SIPC acts to organize the distribution of customer cash and securities to investors.  To the extent that customer cash or securities are unavailable, a SIPA liquidation would provide insurance coverage of up to $500,000 of the customer's brokerage balance, including up to $250,000 in cash. Should a customer's investment exceed the compensation afforded by SIPC, a SIPA trustee would then be tasked with recovering further assets to satisfy the difference.

SIPC coverage is not all-encompassing, however, and generally does not apply to investments such as commodity of futures contracts, investment contracts, and oil/gas/mineral leases unless those investments are registered with the SEC.  Most types of securities, such as stocks, bonds, certificates of deposit, and notes are generally covered by SIPC.  According to its website, 

no fewer than 99 percent of persons who are eligible have been made whole in the failed brokerage firm cases that it has handled to date.

Since its inception in 1970, SIPC has advanced $1.6 billion as part of wider efforts to enable the recovery of $109.3 billion in assets for nearly 750,000 investors.  

SIPC has played an instrumental role in the ongoing liquidation of Bernard Madoff's failed brokerage firm.  Of the $7.3 billion of claims allowed by trustee Irving Picard, SIPC has provided nearly $800 million in advances to customers of Madoff's fraud.  In Picard's motion for approval of a first interim distribution to investors, he revealed that SIPC advances alone fully satisfied the claims of 868 Madoff victims.  

Stanford's scheme advised clients from 113 countries to purchase more than $7 billion in certificates of deposit ("CDs") from the Stanford International Bank in Antigua.  The SEC instituted civil proceedings in February 2009, and a receiver, Ralph Janvey, was appointed to marshal assets for victims.  A criminal indictment soon followed in June 2009.  Soon after his appointment, Janvey inquired as to whether Stanford's victims qualified for SIPC coverage.  Responding to Janvey's letter in August 2009 (the "August 2009 Letter"), Stephen Harbeck, the President of SIPC, gave several reasons for the decision that "there is no basis for SIPC to initiate a proceeding under SIPA," which included:

  • The SEC had not formally notified SIPC of the need to act;
  • The CDs were issued by Stanford International Bank Ltd. ("SIBL"), which is not a SIPC member;
  • SGC did not issue purchase confirmations for the CDs, nor were the CDs held at SGC's clearing firms;
  • Investors received custody of their CDs after purchase; and
  • Antiguan liquidators believed that substantive consolidation was not warranted.

Additionally, even had Stanford implied that SIPC would protect the underlying value of the CDs, Mr. Harbeck stated that this had no impact on his analysis.  

Following the August 2009 Letter, a consortium of nearly fifty members of the U.S. Senate and House of Representatives sent a letter to then-SEC Chairwoman Mary Shapiro, requesting that the SEC take immediate action to order a liquidation proceeding of SGC and examine the possibility of extending SIPC coverage to Stanford victims.  Over the next two years, ten more letters (available here) followed from various members of Congress urging the SEC to expedite its review of the applicability of SIPC coverage.  At one point, United State Senator David Vitters (R., La.) threatened to block two nominees to the SEC until the agency released its decision.  (The SEC released its decision the next day).  

On June 15, the SEC issued its decision, finding that SGC had failed to meet its obligations to customers, and "that the statutory requirements for instituting a SIPA liquidation are met here." The main point of dispute centered on the interplay between SGC - a SIPC member - and Stanford International Bank - a non-SIPC member.  In the Stanford scheme, investors with accounts at SGC purchased SIBL CDs by depositing funds with SIBL.  SIPC had taken the position that coverage was not appropriate because investors purchased the CDs from SIBL, not SGC.  However, the SEC's analysis focused more on the substance of the transactions, rather than the form, in finding that disregarding the separate corporate form of the Stanford entities was appropriate.  Thus, by purchasing CDs from SIBL, customers were effectively depositing money with SGC.  The SEC also likened any result to the contrary as consistent with the goals of the fraudster, saying

Based on the totality of the facts and circumstances, the Commission has concluded that investors with brokerage accounts at SGC who purchased SIBL: CDs through SGC should be deemed to have deposited cash with SGC for purposes of SIPA coverage.  Doing otherwise on the facts of this case would elevate form over substance by honoring a corporate structure designed by Stanford in order to perpetrate an egregious fraud.

SIPC pledged to review the SEC's findings "as quickly as possible" and declared that it would provide a decision by September 15.  However, after September 15 came and went, SIPC Chairman Orlan Johnson issued a statement on September 16 stating that SIPC was "continuing its careful review" of the Stanford case and did not have a decision to announce.  

In response to SIPC's continuing silence, a group of Congressional members sent a letter on November 22, stating that "after more than 22 weeks, the Stanford victims and the American people want and deserve answers." In offering their assistance, the Representatives also noted that the lack of a final decision or satisfactory update on SIPC's progress by December 15th - six months after the SEC decision and three months after the SIPC board meeting - would result in the recommendation to the House Financial Services Committee for the intitiation of a formal inquiry into SIPC's handling of the matter.  SIPC has not issued a response to the letter.

The court-appointed receiver for the Stanford entities, Janvey, has been criticized for the failure to recover more assets for victims.  Indeed, a June filing by a group of Stanford investors accused Janvey's legal team and associated experts of collecting nearly all of the $120 million recovered to date in fees.  A federal judge later expressed his concerns that Janvey's search for additional resources was duplicative of ongoing efforts by the Department of Justice, and asked when a claims process might be instituted for victims.  Janvey recently filed papers seeking approval for a proposed claims process, although he declined to speculate as to the amount that investors could expect in an initial distribution. 

A decision by SIPC to provide coverage to Stanford victims, as urged by the SEC, would be a welcomed move. At present, the victims stand to receive pennies on the dollar for funds lost to Stanford's scheme.  However, a look at the effect of SIPC intervention in the Madoff proceeding shows that over 1/3 of the approximately 2,425 allowed claims were fully satisfied as a result of SIPC advances.  While such a system differs slightly from typical Ponzi proceedings where all victims are promised a pro rata share in any recovered proceeds, a SIPC-involved proceeding would aim to compensate each investor equally - at least up to the first $500,000 of losses.

A copy of the August 14, 2009 letter from SIPC to Janvey is here.

A copy of the SEC decision directing SIPC coverage is here.

A copy of the Congressional letters sent to the SEC in support of the decision on SIPC coverage is here.

A copy of the November 22, 2011 letter from Congress is here.

Saturday
Oct152011

Judge to Stanford Receiver: Stop Looking for Pot of Gold and Start Repaying Investors

“When the U.S. Justice Department has already checked and there’s no pot of gold, then the receiver can stand down,”

- United States District Judge Godbey

The federal judge overseeing the court-appointed receiver tasked with recovering assets of R. Allen Stanford's alleged $7 billion Ponzi scheme recently expressed his desire to see a claims process initiated for the repayment of assets recovered thus far to victims.  Additionally, U.S. District Judge David Godbey expressed concern that receiver Ralph Janvey may be depleting funds that could potentially be distributed to victims by duplicating efforts of the United States Department of Justice, which is also investigating Stanford as it continues to work towards putting Stanford on trial in early 2012. 

As covered by Ponzitracker here, calls have been growing from Stanford victims that Janvey's ongoing crusade to recover assets for victims have accomplished little and instead continue to build the amount of fees paid to Janvey for his efforts.  This concern was echoed by Judge Godbey at a hearing Thursday, who stated he was "concerned the receiver is expending resources that could otherwise be distributed to investors trying to track down missing resources.”  The frustration comes from the search thus far for assets related to Stanford's alleged $7 billion fraud; to date, Janvey and his legal team have recovered approximately $100 million in unrestricted cash.  The Receiver has liquidated nearly all of the saleable assets under its control, and is currently in negotiations with liquidators in Antigua and Barbados to determine the best course to take with Stanford's island properties there.  Additionally, Janvey and his team have filed more than 100 "clawback" lawsuits, which, if successful, could add up to $500 million to that total.  According to Kevin Sadler, the lead attorney representing Mr. Janvey, "we've sued everyone we can find."

Judge Godbey cited the ongoing efforts by U.S. prosecutors, who have won asset freezes on more than $300 million in Stanford-related bank accounts abroad.  Those funds are outside the reach of Janvey's duties, and could possibly be returned to victims through the process of remission, as recently seen in the AdSurfDaily Ponzi scheme and detailed on Ponzitracker here.  Judge Godbey has asked for a plan entailing what it would take to wrap up the search for Stanford's assets and what the initiation of a claims process for investors would cost.   

Previous Ponzitracker coverage of the Stanford Ponzi scheme 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.

Friday
Aug052011

Accounting Firm Wins Request for $20 Million of Frozen Stanford Assets

A United Kingdom judge has granted a request by an accounting firm overseeing the liquidation of Stanford International Bank ("SIB") to use $20 million in previously-frozen assets to fund litigation pursuing the return of assets from individuals associated with the scheme.  Judge Elizabeth Gloster, a judge in the Commercial Court, granted the request of Grant Thorton, the global accounting firm appointed to liquidate Stanford's failed operations in England, ruling that the funds could be used to fund litigation against financial institutions who worked with Stanford and in clawback actions against investors who received profits exceeding their invested principal.  These efforts would center on the Caribbean region, including Antigua, where Stanford International Bank had extensive ties.

Grant Thorton had asked for $20 million, with $5 million to be available immediately, out of an estimated $100 million in SIB's assets currently held in several hedge funds.  The United Kingdom Serious Fraud Office, acting on behalf of the Justice Department, had opposed the request, arguing that the assets should instead be returned to the United States, where court-appointed receiver Ralph Janvey is leading efforts to recover funds for victims of Stanford's fraud.  

Stanford has maintained his innocence, and is currently scheduled to stand trial in January 2012.