Stanford Receiver Seeks Possession of Libyan Withdrawals

In a lawsuit filed earlier this month, Stanford receiver Ralph Janvey sought to have a federal judge determine if $55 million should be returned to defrauded investors rather than to the Libyan government.  Along with the lawsuit, filed June 6, Janvey also obtained a court order freezing $55 million worth of Libyan assets in United States banks.

Recent filings have accused the Libyan Investment Authority, the investment arm of the Libyan government, of advanced knowledge of the impending crisis involving Stanford and subsequent action on that information by withdrawing funds days before Stanford's scheme would collapse.  According to court filings, the Libyans withdrew $55 million between November 2008 and late-January 2009.  The Securities and Exchange Commission filed civil charges against Stanford's operations weeks later on February 16, 2009.

While the lawsuit has been filed under seal in Texas federal court, Janvey's attorneys have indicated that the money should be returned for the benefit of defrauded investors because the withdrawals constituted a fraudulent transfer, governed by the Texas Uniform Fraudulent Transfer Act ("TUFTA"). Under TUFTA, an action must be brought to recover a fraudulent transfer within four years of the transfer.  The judge presiding over the case has scheduled a December hearing to determine ownership of the funds.  Stanford's trial was recently postponed from September to January of next year due to medical issues.

HSBC Seeks Dismissal of Madoff Trustee's Suit

In December 2010, HSBC and  a dozen 'feeder-funds' were sued by Irving Picard for $9 billion.  Picard, the court-appointed trustee overseeing the liquidation of Madoff's firm, charged that the banking giant and funds were complicit in Bernard Madoff's fraud.  During a hearing in New York today, HSBC argued that Picard and his attorneys lacked standing to bring such a suit on behalf of defrauded investors.  Such a legal strategy is a common argument used to counter trustee-initiated lawsuits.

Under 28 U.S.C. §754, receivers are vested with "complete jurisdiction and control of all such property with the right to take possession thereof."  Under this theory of exclusive jurisdiction, Picard argued in a filing earlier this month that as a trustee, he had "standing to assert common law claims to seek damages."  Had HSBC reacted appropriately to the red flags surrounding Madoff's activities Picard argued, the scheme would have been uncovered much earlier, saving billions in losses.

In addition to contesting Picard's standing in bringing the suit, HSBC has also pointed to massive losses it incurred as a result of Madoff's fraud.  HSBC has alleged that it sustained losses of nearly $1 billion invested in the feeder funds that evaporated when Madoff's fraud was exposed.  District Judge Jed Rakoff has indicated that he plans to issue a written ruling by the end of July.

SEC Adopts New Hedge Fund Regulations

The SEC today adopted new regulations aiming to implement key provisions of the recent Dodd-Frank Act, including some provisions that may aid in the future detection of ponzi schemes.  Until the Dodd-Frank Act, many private advisers overseeing large asset bases were largely excluded from regulatory scrutiny.  

Among the new requirements include the mandatory disclosure by advisers to private funds of basic organization information about each fund under management including size and ownership, and identification of individuals/entities providing key tasks for the fund such as auditors, custodians, administrators, and marketers.  Additionally, funds will have to disclose the use of practices that may present a potential conflict of interest, including the use of compensation for client referrals and the recent focus on the use of soft dollars.

The new regulations offer much-needed transparency that arguably will result in better regulatory oversight and faster detection of questionable business practices.  Proponents argue that warning signs, such as the use of a a 'mom-and-pop' auditor in a multi-billion dollar fund (see Madoff) or consistent out-performance of market indices, will be much more visible with the enactment of the regulations.  

One potential limitation of the new regulations is their inapplicability to advisers of private funds with less than $100 million in assets.   Such funds would be exempt unless they agree to voluntarily register with the SEC.  The new regulations are currently scheduled to take effect March 30, 2012.

Court: Political Committees Must Return Stanford Donations

A Dallas federal court today ordered the return of nearly $2 million in political donations made by Robert Allen Stanford that had been sought by Ralph Janvey, the court-appointed receiver.  While noting that there appeared to be no bad faith on the part of the five Republican and Democratic national political committees, District Court Judge David Godbey agreed with Janvey that the money should be returned to benefit the defrauded investors of Stanford's scheme.  In total, the amount to be returned exceeds $1.7 million including court-ordered pre-judgment interest.

In his order granting Janvey's motion for summary judgment, Judge Godbey recognized the inherent principles of equity and the fact that the political committees would "endure no greater hardship than that suffered by other innocent victims of the Stanford defendants’ Ponzi scheme who must do the same.” Janvey has filed a large amount of 'clawback' lawsuits that seek funds from investors who received distributions in excess of their principal amount invested with Stanford.  According to the Stanford Receivership website, Janvey has filed 844 clawback lawsuits to date.

Also of interest is the apparent effort by the political committees to avoid such an outcome.  One of the attorneys representing Janvey has indicated that he intends to seek reimbursement for legal fees expended in litigating the issue.  

Stanford Trial Delayed Again until January 2012

The trial of Robert Allen Stanford, accused of running a massive $8 billion Ponzi scheme, has again been delayed on the advice of Stanford's doctors.  Stanford, who suffered injuries in a prison altercation in September 2009, needs more time to rehabilitate and recover from an addiction to prescription drugs following the prison beating.  The trial, originally scheduled for September 12, will now start in January 2012.

Stanford is accused of running an elaborate scheme in which investors were promised high rates of return on certificates of deposit issued by Stanford International Bank through the Stanford Group Co.  Prosecutors have accused him of misappropriating over $1.6 billion of the funds collected in the scheme, and a receiver has been appointed to marshal assets for the estimated 7,800 victims.

As the Ponzi Tracker recently noted, the SEC voiced its opinion that investors in Stanford's scheme were entitled to compensation from the Securities Investor Protection Corporation ("SIPC"), which aims to compensate investors in failed brokerage firms.  Should the SIPC refuse the SEC's request, the SEC has indicated it is prepared to file a lawsuit to compel such action.