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.