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.

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.

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.

SEC Looking Into Stanford Receiver Fees

In response to growing investor displeasure, the Securities and Exchange Commission has confirmed it is opening an investigation into fees charged by the court-appointed receiver of Allen Stanford's $7 billion Ponzi scheme.  The receiver, Ralph Janvey, was originally appointed by a Dallas federal judge at the request of the SEC following the exposure of Stanford's fraud.  As reported by CNBC, the SEC is specifically looking into allegations of improper conduct of SEC employees.

As covered earlier by Ponzitracker, a group of Stanford investors displeased with Janvey's progress had filed a motion to intervene on July 7, alleging that the recovery to date had been largely consumed by fees paid to the receiver.  In support, the investors claimed that, of the $120 million collected thus far to date by Janvey, nearly all - $118.2 million - had been paid to Janvey and his legal team as expenses, leaving just $1.5 million available to investors.  Yet, according to the attorney for the investors bringing the motion, the SEC had not objected to any bill presented for payment by Janvey for over a year.  

Further, the group alleged that an arrangement reached between Janvey and a court-appointed group supposedly responsible for overseeing the Receiver's actions was instead an improper arrangement in which the group would receive 25% of all future recovery of fraudulent transfer lawsuits.  

An attorney for Janvey responded to the latest allegations, stating that Janvey would comply promptly to any inquiry, and that any allegations of an inside deal between Janvey and the investor committee was "patently false and completely irresponsible."  

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.