Proskauer, Chadbourne off the hook in Ponzi scheme class action
Davis Polk & Wardwell and Paul, Weiss, Rifkind, Wharton & Garrison had to make a key strategic decision when they moved to dismiss a securities class action accusing Proskauer and Chadbourne & Parke of abetting R. Allen Stanford’s Ponzi scheme. The firms had a veritable arsenal of defenses to deploy: qualified immunity because the law firm defendants were acting as counsel to Stanford; no evidence of fraudulent intent by the law firms; no duty to Stanford’s investors. But the first defense both Davis Polk and Paul Weiss chose to assert in motions to dismiss on behalf of Proskauer and Chadbourne was more technical. The Dallas federal court class action, they asserted, had to be dismissed because the Securities Litigation Uniform Standards Act of 1998 pre-empts its claims, which were all grounded in Texas state law.
“Putting aside the absence of any viable federal claims,” wrote Proskauer’s counsel from Davis Polk, “because plaintiffs have chosen to bring their claims not only on their behalf, but also on behalf of a putative class, their claims are barred by SLUSA, and they cannot ‘be maintained’ as a class action in this or any other court.”
The strategy turned out to be a good one. On Friday U.S. District Judge David Godbey of Dallas federal court dismissed the class action without granting leave to appeal. The case, he said, was precluded by SLUSA. You have to give class counsel from Castillo Snyder and Strasburger & Price credit for trying to get around the U.S. Supreme Court’s 2008 ruling in Stoneridge v. Scientific-Atlanta, which pretty much cuts off federal securities law claims against the law firms, auditors, and investment advisers to accused fraudsters. The allegations against Chadbourne and Proskauer all involved the advice that Stanford counsel Thomas Sjoblom (who lateraled from Chadbourne to Proskauer after he began representing the Ponzi schemer) gave to his client. The class didn’t offer evidence that either of the law firms communicated directly with Stanford’s investors — the standard they would have had to meet to bring federal securities claims.
So instead, the amended class action complaint against Sjoblom, Chadbourne, Proskauer, and a former Stanford general counsel was based on Texas’s state securities laws. The complaint claimed that former Securities and Exchange Commission enforcement lawyer Sjoblom — and, by extension, the firms at which he practiced — should have known Stanford was running a Ponzi scheme, but helped keep him afloat nonetheless.
If Stanford had been trading stock, it would have been a no-brainer for Davis Polk and Paul Weiss to cry SLUSA. He wasn’t. Stanford sold investors instruments he called CDs from the Antiguan bank he controlled. These CDs functioned as mutual or hedge fund shares. But it wasn’t entirely clear that they fell under SLUSA’s definition of securities, which is limited to instruments traded on a national exchange. Davis Polk argued that because Stanford investors liquidated stock and bond holdings in order to purchase Stanford CDs — and because Stanford claimed that the CDs were backed by stocks and bonds — the Stanford instruments fell under SLUSA’s definition of a covered security.
Because Godbey agreed, he never even reached the other defenses Proskauer and Chadbourne — and, for that matter, other Stanford defendants whose motions to dismiss he granted on SLUSA grounds — might have argued. Proskauer counsel James Rouhandeh of Davis Polk declined comment, as did Chadbourne counsel Daniel Beller. I left a message with class counsel Edward Snyder but didn’t hear back.
October 25, 2011
UPDATE TO STANFORD CLIENTS
Dear Stanford clients:
The KLS Stanford Team.
By Pascal Fletcher
The liquidators of accused Ponzi schemer Allen Stanford’s bank in Antigua are seeking to cut a deal with a U.S. receiver to recover assets for thousands of fraud victims and end a legal turf war entangling the process.
More than 12,000 claimants say they were bilked by the $7 billion scam U.S. prosecutors allege was masterminded by the flamboyant Texas one-time billionaire and sports entrepreneur, whose business empire stretched to the Caribbean and Europe. Arrested in 2009, he denies wrongdoing and is awaiting trial.
Many of his victims have complained that wrangling over jurisdiction between the liquidators appointed by an Antiguan court and the U.S. receiver has hindered the already complex and difficult task of recovering assets from the web of Stanford’s businesses and bank accounts across the world.
“It’s an extraordinarily complex process,” Hugh Dickson, one of two liquidators appointed by the Eastern Caribbean Supreme Court in May, told Reuters in a phone interview.
Dickson and colleague Marcus Wide were appointed as liquidators for Antigua-based Stanford International Bank (SIB) which issued the certificates of deposit at the heart of the alleged Ponzi scheme. They replaced two previous liquidators.
Dickson said talks were underway in Dallas with the U.S. receivership team involved in the U.S. Securities and Exchange Commission’s (SEC) civil fraud case against Stanford.
“It’s about working out the best way of maximizing the size of the cake, rather than how the existing cake is cut into slices,” he said. The aim of the discussions was “avoiding unnecessary and unproductive clashes” over Stanford’s assets.
Dickson and Wide were proposing a common claims process for recovery of assets linked to SIB, and would also look to cooperate with the U.S. receiver in recovery-related litigation cases. Calls to the phone and office of the U.S. receiver, Ralph Janvey, were not immediately returned.
So far, Stanford’s victims have faced slow progress in efforts to claw back the hundreds of millions they entrusted to the jet-set businessman, who lived a lavish Caribbean lifestyle and gained news headlines with generous cricket sponsorship.
Dickson said his predecessors as liquidators had only recovered about $300,000 in Britain and Antigua, while the SEC receivership had achieved asset recoveries of more than $200 million, but had incurred costs of over $100 million and had not started to distribute the surplus.
“TIME AND MONEY”
On a hour-long online “Webinar” with victims this week, Dickson and Wide faced hundreds of questions, many asking “When will we get our money back?” and “Why is it taking so long?”
“If you’re a victim here, you placed a deposit with a bank that you were told was flush with money, was a robust financial institution, and it’s very difficult to understand why your money is not readily available,” he said.
“When you’re dealing with a fraud, where effectively someone has stolen money and tried to hide it away, it’s not always immediately obvious as well where the assets even are, you have to actively look for them and fight for them to get them back, and that takes time and money,” Dickson said.
But he said he and Wide had made “considerable” advances in the last few months.
He cited $3.2 million in cash recovered from Panama and a further just over $4 million expected to be recovered from the sale of a Bank of Antigua building owned by Stanford.
In addition, the liquidators had managed to gain access to up to $20 million in UK funds to be used to pay for the fees and costs of the liquidation and recovery activities.
“On top of that, we have obtained freezing orders against a group of Stanford-related entities in Antigua that hold assets that we feel are the proceeds of crime,” Dickson said.
These consisted of real estate and property worth about $70 million, as well as land held by subsidiaries of the SIB thought to be worth as much as $250 million.
The liquidators were following leads on further assets held in Latin America and other jurisdictions, and were considering litigation against other third parties, Dickson said.
U.S. CRIMINAL PROBE
Dickson said there was also around $250 million in Swiss and UK bank accounts, in cash and financial instruments. But these assets had been frozen under a criminal investigation order initiated by the U.S. Department of Justice (DOJ).
French bank Societe Generale said last month it was cooperating with the DOJ investigation after the Wall Street Journal reported the probe involved an account held by Stanford with SG Private Banking (Suisse) SA, a Societe Generale subsidiary.
Dickson declined to confirm which banks were involved, but said the liquidators had met with the Department of Justice and the Swiss and UK authorities to discuss the issues.
“We want to persuade the Department of Justice to withdraw their efforts to recover the money,” Dickson said, adding the liquidators had requested this because they felt their own process for dealing with the funds and distributing them to victims would be faster and more transparent than the DOJ one.
A Justice Department spokeswoman declined comment, citing a gag order imposed on the criminal case against Stanford.
“The DOJ keeps referring to this as repatriation, but the money doesn’t necessarily originate from the U.S. in the first place,” Dickson said.
He added that according to the liquidators’ records of the creditor base for recovery purposes, the U.S. interest only amounted to 15 percent of the total, and might be much less once ownership of U.S. investment vehicles was factored in.