Another Setback for Stanford Receiver

Already facing criticism from victims and a potential investigation by the SEC over fees incurred thus far, Stanford receiver Ralph Janvey saw another setback as the Fifth Circuit Court of Appeals vacated its prior ruling in Janvey v. Alguire that had previously held Janvey could not be compelled to arbitrate claims with certain third-party victims of Stanford's scheme. Janvey was appointed by the court to marshal and distribute assets for the benefit of the thousands of victims defrauded by Allen Stanford's $7 billion Ponzi scheme, in which Stanford purportedly sold certificates of deposit to investors with above-average returns.

The Fifth Circuit's ruling, a copy of which is available here, vacates the prior decision rendered on December 15, 2010 (the "December 15 Decision"). In the December 15 Decision, the district court granted Janvey's request for a permanent injunction freezing assets of former financial advisors and employees of Stanford pending the outcome of Stanford's criminal trial. Additionally, while the district court made this decision before deciding on a motion to send the claims to arbitration as requested by Alguire, the Fifth Circuit took the unusual step of deciding that Janvey's claims could not be submitted to arbitration even though the motion had not been addressed by the district court. This decision was a victory for Janvey, who, if forced to arbitrate every claim with defrauded investors who had entered into a contract with the fraudster who had included an arbitration provision, would incur much greater costs rather than resolve the claim through litigation in the court system. The December 15 Decision, while seen as a victory for court-appointed receivers, has quickly seen its effect muted by building opinions to the contrary, including the later-issued decision in Javitch v. First Union Securities. 

In its decision vacating the December 15 Decision, the Fifth Circuit affirmed its findings that the issuance of a permanent injunction was appropriate, but vacated its previous finding that Janvey's claims could not be submitted to arbitration, finding that it had no jurisdiction to decide this question due to the fact that there was "no ruling on the motion to compel arbitration." Instead, the Fifth Circuit remanded the issue back to the district court to decide whether Janvey could be compelled to arbitration. When the decision is made by the district court, it is likely the issue will return for review by the Fifth Circuit.

Javitch joins a growing number of opinions that interpret the Federal Arbitration Act as encouraging a liberal policy to compel arbitration. Yet, many question the propriety of allowing a schemer whose inclusion of an arbitration clause during the commission of a fraud can essentially tie a Court's hands and prevent review. Further, especially in light of the Receiver's court-mandated mission to marshal and distribute assets to defrauded investors, the cost of being forced to arbitrate tens, if not hundreds, of investor claims can result in a staggering depletion of assets that would otherwise be earmarked for distribution. In a report by the Public Citizen, a Washington, D.C. advocacy group, it was surmised that "Arbitration costs will probably always be higher than court costs in any event, because the expenses of a private legal system are so substantial." In light of Congressional action to the contrary, a far-reaching interpretation of the Federal Arbitration Act will continue to pose problems for Court-appointed receivers.

Missouri Ponzi Schemer Sentenced to Eight Years in Prison

A former financial broker was sentenced to ninety-seven months in prison for his role in a Ponzi scheme that ultimately cost investors millions of dollars.  Joshua Gould, 32, was also ordered to pay restitution of $4.3 million to the victims of his scheme  Gould was indicted earlier this year on charges of mail fraud and wire fraud, which each carry a maximum prison sentence of twenty years.

Gould was a former registered financial representative at Woodbury Financial Services in University City, Missouri.  He then joined co-defendant David Rubin at Coral Mortgage Bankers Corporation, where they solicited investors promising annual returns in exchange for funds to serve as collateral for Coral's operations.  Yet, instead of using these funds to invest in Coral's business, Gould and Rubin used the funds for personal expenses.  Gould also used investor funds to serve as start-up capital for several side businesses, including an online ticket sales broker.  Gould would provide Rubin with money to be paid to investors as purported "interest" payments.  When investors would direct that these "interest" payments be rolled into their existing principal investment, Rubin would pocket the funds.  All told, Gould misappropriated over $4 million of investor funds.

Prosecutors had asked for a sentence commensurate with federal sentencing guidelines, which suggested a minimum sentence of ninety-seven months, while Gould's attorney had requested a downward departure from the guidelines.  There is no parole in federal prison.  

Prison Sentence for Georgia Ponzi Schemer

A Statesboro man was recently sentenced to twenty-seven months in federal prison for operating a commodities trading operation that was revealed to be a Ponzi scheme.  Joseph L. Autry, 44, was also ordered to serve a three-year supervised release term, along with $155,200 in restitution to defrauded investors.

Autry operated Autry Capital Management LLC, which, from May 2008 until January 2010 took in over $250,000 from investors who were promised high returns from what they assumed was sophisticated currency future contract trading. Instead, Autry commingled investor funds and used investor funds to pay personal expenses and returns to older investors.  

Autry also faces potential fines from the Commodity Futures Trading Commission, which initiated an action against Autry in September 2010 seeking civil monetary penalties and restitution to investors.

SIPC Files Motion Opposing Wilpon Efforts to Dismiss Case

The Securities Investor Protection Corporation ("SIPC") filed documents opposing an effort by Sterling Equities, consisting of owners of the New York Mets baseball team, to dismiss trustee Irving Picard's suit seeking $1 billion transferred by Bernard Madoff. During a hearing on July 1 in New York federal court, United States District Judge Jed S. Rakoff questioned the viability of Picard's approach, which seeks not only to recover the $300 million in false profits above Sterling's initial investment, but also the $700 million of initial principal on the notion that the Mets' owners knew or should have known of the fraud through their extensive dealings and relationship with Madoff.  SIPC is in agreement with Picard that a reading of bankruptcy law permits the trustee's approach.

The vast majority of actions filed by Picard have sought only fictitious profits above and beyond an investor's initial principal.  This course of action is pursuant to Section 548(c) of the Bankruptcy Code, which states that a transferee who receives funds that would otherwise be subject to avoidance under the Code is entitled to retain those fund when the transferee gives value and the transfer is taken in good faith.  Picard has not pursued such a position in nearly all of his lawsuits, instead seeking the return of profits from so called "net winners" of Madoff's scheme for pro rata distribution to defrauded investors aptly termed "net losers."

Picard alleges that Sterling Equities and its principals should have been alerted to the nature of Madoff's scheme through numerous red flags and warning signs.  Additionally, their involvement in litigation seeking the return of principal and fictitious profits from an investment in the Bayou Superfund, which was later revealed to be a massive Ponzi scheme, should have also alerted Sterling to Madoff's fraud.  Instead, as Picard and SIPC allege, the profitable nature of the relationship with Madoff caused the Sterling defendants to ignore these warnings.  As SIPC states,  

The long-term nature of the relationship and its scope enabled the Defendants to gain insight into Madoff and his operations. In the face of such knowledge, the actions of the Defendants, as alleged in the Complaint, are proof of the Defendants’ lack of good faith, and their inability, therefore, to establish good faith as a defense to the Trustee’s fraudulent conveyance claims against them. 

A copy of SIPC's Motion Opposing the Sterling Defendant's Motion to Dismiss is here. 

Lawyer Seeks to Withdraw in South Florida Ponzi Case

Newly-filed court documents indicate that the lawyer for Joel Steinger, accused of running a $1.25 billion Ponzi scheme, is seeking to withdraw as counsel due to the apparent inability of his client to pay his legal bill.  Ed Shohat, a prominent Miami criminal defense attorney, claims he is owed in excess of $2.5 million for his past and continuing representation of Steinger, and that he has not been paid since May 2008.  While Steinger may have intended to use proceeds from the attempted sale of his $3.1 million home, prosecutors recently filed court documents indicating the government intends to seek forfeiture of the home should Steinger be convicted, reasoning that funds from his scheme were used to pay for it.

Steinger was charged in January 2009, along with several other individuals, in a twenty-five count indictment alleging that his involvement with Mutual Benefits Corp. was an elaborate Ponzi scheme that bilked more than 28,000 victims out of nearly $1 billion dollars.  Mutual Benefit purported to sell viatical and life insurance settlements through a network of sales agents, which were marketed as safe investments without risk  In reality, many of the policies marketed could not be re-sold, life-expectancy figures were manipulated, and investor funds were commingled to pay premium obligations on older policies.

Thus far, ten individuals associated with Mutual Benefits Corp. have pled guilty, including attorney Michael McNerney, who pled guilty to a conspiracy charge earlier this year.  Steinger is not scheduled to stand trial until early 2013.  Steinger's case has been overshadowed by convicted Ponzi schemer Scott Rothstein, who was indicted shortly before Steinger for a $1.2 billion Ponzi scheme selling purported civil settlements.  Rothstein has since been sentenced to 50 years in prison.