For the more than 20,000 investors who have thus far received little or nothing from their investment in Stanford CDs, money recovered from wherever it resides today is likely the largest portion of the money they will ever receive in restitution. CD Proceeds — comprising purported CD principal and interest payments to the Stanford Investors — are little more than stolen money and do not belong to the Stanford Investors who received such funds but belong, instead, to the Receivership Estate.
- Clawback complaint
Nearly six years after Allen Stanford was arrested and charged with masterminding the second largest Ponzi scheme in U.S. history, which caused billions of dollars in losses to thousands of victims worldwide, a court-appointed receiver is preparing to proceed with the first of dozens of trials seeking to "clawback" hundreds of millions of dollars from those lucky enough to profit from their investment with Stanford. Ralph Janvey, the court-appointed receiver, filed so-called "clawback suits" against hundreds (if not thousands) of Stanford investors that received purported returns in excess of their original investment in Stanford's bogus certificates of deposit. With victims having received approximately 4% of their losses to date, stakes are high in the suits - which Janvey has previously acknowledged as "the single largest potential source of funds which may be recovered for the benefit of Stanford’s victims."
Stanford's fraud involved the offering of CDs carrying guaranteed rates of return and likened to the safety and security of similar CDs issued by commercial banks. The increased return, along with the promised safety of the investments, made the CDs enticing - a typical Stanford CD offered returns at least two to three percentage points higher than a bank-issued CD. At least 18,000 victims in the U.S. alone suffered collective losses of billions of dollars when Stanford's empire finally collapsed in early 2009.
"Everybody who got money from Stanford has two things in common: One, they don't want to give it back. Two, they claim they're completely innocent and had no idea anything untoward was going on,"
- Janvey attorney Kevin M. Sadler
Following his appointment, Janvey filed numerous clawback lawsuits against victims and other third parties that he contended wrongfully received illicit scheme proceeds. The suits, brought under the version of the Uniform Fraudulent Transfer Act adopted by Texas ("TUFTA"), claim that the transfers to the investors were made with the actual or constructive intent to hinder, delay, or defraud, and that equity requires that those profits be returned to the receivership where they may be distributed in a pro rata fashion to those less-fortunate investors. Proceeding under a theory of actual intent to hinder, delay, or defraud, which can be satisfied through the finding that the perpetrator operated a Ponzi scheme, shifts the burden to the clawback defendant to demonstrate both that they showed good faith and took the transfers for reasoanbly equivalent value.
In analyzing reasonably equivalent value, courts have been quite clear that, while returns to an investor up to the amount of that investor's invested principal can be made for reasonably equivalent value under the theory that such return extinguishes that victim's claim for return of their principal, returns exceeding an investor's invested principal can never be made for reasonably equivalent value. Similar suits brought by court-appointed receivers and/or bankruptcy trustees have enjoyed a significant success rate.
However, Janvey has faced several significant obstacles in bringing clawback claims that have correspondingly delayed prosecution of the suits. For example, Janvey initially sought to recover not only the profits realized by clawback defendants but also the underlying returned principal. For example, an investor that realized $40,000 in profits on an investment of $100,000 would be targeted for the return of $140,000. While Janvey took the position that such course was necessary to enlarge the size of potential returns to less-fortunate investors, the Securities and Exchange Commission took the rare step of opposing the strategy. While the Commission has approved a receiver's ability to seek the return of principal from certain investors in other situations upon a demonstrated lack of good faith or other circumstances, it opposed a one-size-fits-all approach in seeking interest and principal from undisputed innocent investors. This resulted in a 2009 court ruling holding that Janvey was limited to only seeking the return of interest from clawback defendants.
Janvey has also been locked in a battle with hundreds of former sales brokers employed by Stanford who peddled the CDs to investors. Janvey has sued the brokers for the return of hundreds of millions of dollars in commissions and other recruitment bonuses they were paid for selling the CDs; the brokers have refused to repay the monies and sought instead to force Janvey to abide by the arbitration clauses contained in their employment agreements with Stanford's entities - meaning that, if successful, Janvey could be forced to incur exponentially higher costs in individually arbitrating each of the over-300 claims.
Dozen Trials Scheduled in 2015 and 2016
The clawback of hundreds of millions of dollars in false profits from Stanford investors likely represents the largest source of potential remuneration for thousands of Stanford's victims. At least a dozen clawback trials are scheduled to occur in 2015 and 2016, with the receiver's case against Peter Romero scheduled to proceed first in February 2015.
Romero is a former State Department official during the Clinton administration who subsequently signed on to work for Stanford as a consultant in the early 2000's. According to the receiver, Romero's primary role was to recruit new investors to the scheme - trading on "his prior government service to become an ambassador for Allen Stanford." Janvey originally sued Romero in February 2011 for the return of nearly $600,000 in compensation, and subsequently amended the suit to increase the amount sought to nearly $1 million. Janvey alleged that Romero allowed Stanford to attract potential investors and curry favor with polticians by leveraging his reputation and government contacts. Janvey has also recently alleged that Romero willfully destroyed evidence of his relationship with Stanford by deleting the email account he used to communciate with Stanford in the days following the revelation of the scheme in 2009.
Janvey's attorneys have recognized the significance of the Romero case as a "bellwether" for the significant number of clawback claims they have brought. Indeed, the outcome - whether a victory or defeat for Janvey - will likely influence the potential for settlement in the cases set to go to trial later this year and next, as the victorious side will be able to further bolster their position.
Romero's lawyers have denied Janvey's allegations, instead attempting to satisfy their affirmative defenses under TUFTA by alleging that "Romero was a good-faith transferee whose services as a member of the Stanford International Advisory Board for market-rate compensation constituted reasonably equivalent value."
In closing, the stakes are high for Janvey on the eve of commencement of these clawback suits, which present victims' best (and likely last remaining) chance to realize any significant remuneration for their losses. While Janvey himself acknowledged to CNBC that victims would ultimately not realize more than "pennies on the dollar," every penny surely counts to thousands of victims whose hopes rest squarely on Janvey's efforts.