Fifth Circuit affirms summary judgment against “net winners” of Stanford Ponzi scheme

In a recent opinion, the United States Court of Appeals for the Fifth Circuit held that the Texas Uniform Fraudulent Transfer Act allows a receiver to clawback interest payments made to investors under a Ponzi scheme. Beginning in the 1990s, a network of entities created by R. Allen Stanford sold certificates of deposit to investors through the Stanford International Bank, Ltd., promising extraordinarily high rates of return. In a classic Ponzi scheme, Stanford used later investors’ money to pay prior investors their promised returns. The scheme ultimately collapsed, Stanford and CFO James Davis were imprisoned, and the SEC brought suit against Stanford, his agents, and the Stanford entities, alleging federal securities law violations.

The court-appointed receiver over the Stanford entities brought multiple actions under the Texas Uniform Fraudulent Transfer Act (“TUFTA”) to recover funds paid to investors who purchased certificates of deposit as part of the Ponzi scheme and received back their principal, as well as purported interest on the principal. The Receiver moved for summary judgment on its TUFTA claims against the investor-defendants (described by the court as “net winners” of the scheme), arguing that the payments made to the net winners were fraudulent transfers not made in exchange for reasonably equivalent value. The United States District Court for the Northern District of Texas granted the Receiver’s motions for summary judgment and ordered the investor-defendants to return funds paid in excess of their original investments.

The investor-defendants filed an interlocutory appeal to the Fifth Circuit, which swiftly rejected each of their arguments and affirmed partial summary judgment in favor of the Receiver.

The investor-defendants first argued that the district court’s choice of law analysis was fundamentally flawed and that Antigua law rather than Texas law should apply. The Fifth Circuit concluded the district court correctly applied Texas law, as the scheme was centered in, and operated out of, Houston, Texas, and Texas has a substantial interest in the application of its fraudulent transfer laws because the Receiver, many of the Stanford entities, and some of the defrauded creditors and net winners are in Texas. The court also rejected the argument that the Receiver lacked standing to bring claims under TUFTA, concluding that the Stanford entities, through the Receiver, may recover assets or funds that the entities’ principals fraudulently diverted to third parties without receiving reasonably equivalent value. The court further rejected the investor-defendants’ statute of limitations argument because the suits were filed less than one year after the fraudulent transfer was, or reasonably could have been, discovered (measured from the date of the CFO’s guilty plea). In addition, the court determined that IRA accounts containing net winnings to which the investors had no legal right could not be sheltered as assets.

On the merits of the district court’s grant of summary judgment, the Fifth Circuit first addressed whether TUFTA’s element of fraudulent intent was satisfied. Fraudulent transfer requires that the debtor transferor make the transfer with actual intent to defraud the debtor’s creditors, and in the Fifth Circuit, such intent may be established by proving that a transferor operated as a Ponzi scheme. Here, it was well-established that the Stanford entities were operated as a Ponzi scheme, thereby establishing fraudulent intent.

Next, the court addressed the investor-defendants’ argument that they should be permitted to keep their contractually-guaranteed interest payments for which they asserted they paid reasonably equivalent value. Under TUFTA, a transfer is not voidable against a person who took in good faith and for reasonably equivalent value. Value is given if, in exchange for the transfer, an antecedent debt is secured or satisfied. Here, the CDs issued by Stanford were void and unenforceable, invalidating any contractual claim to interest; thus, the court concluded the investors failed to provide any value for the interest payments that they received. The court explained that, in the context of a Ponzi scheme such as Stanford, each payment of interest to an investor (made possible by a later investor’s deposit) decreases the net worth of the entity operating the scheme. Accordingly, the district court’s grant of partial summary judgment in favor of the Receiver on its TUFTA claims was affirmed. Notably, the Fifth Circuit agreed with the district court’s conclusion that the investors did give reasonably equivalent value to the extent that they received back their principal because they have actionable claims for fraud and restitution. Thus, in contrast to the interest payments, the principal payments were payments of an antecedent debt.

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SEC Says Stanford’s Criminal Conduct Charges ‘Slanderous’

By David McAfee

The U.S. Securities and Exchange Commission on Wednesday urged a Texas federal judge to reject convicted Ponzi schemer Robert Allen Stanford’s call to appoint a special prosecutor and advise the court of criminal conduct by a court-appointed officer, calling his allegations “slanderous, sensational and unsupported.”

The SEC says Stanford — who allegedly led a massive $7 billion Ponzi scheme by selling billions of dollars in self-styled certificates of deposit, promising return rates exceeding those offered by most banks — is falsely accusing the receiver and others of criminal conduct. Receiver Ralph Janvey was appointed to oversee Stanford International Bank Ltd. and its affiliated entities in February 2009, according to court documents.

“Over the course of two weeks, Stanford filed three motions, which do nothing but make slanderous, sensational and unsupported allegations against the receiver, the Department of Justice, the commission and a circuit judge for the U.S. Court of Appeals for the Fifth Circuit,” attorneys for the SEC wrote in their opposition brief. “Baldly accusing the court-appointed receiver of engaging in criminal conduct, Stanford appears to allege that the receiver’s actions, in collusion with the commission and the DOJ, prevented him from defending against the criminal action and resulted in his wrongful prosecution and conviction.”

Wednesday’s motion by the SEC marks the most recent development in the long-running case. The SEC said Stanford’s complaints about the criminal proceeding are “not relevant to this civil action” and should be addressed, if at all, on appeal of his criminal conviction.

Janvey also responded to Stanford’s miscellaneous motions, including his bids for a temporary restraining order and an asset freeze, on Wednesday. Janvey said most of Stanford’s “frivolous pleadings” have previously been litigated.

“There is no legal or factual basis either for the rambling and repetitive assertions contained in Stanford’s filings or for his requested relief,” counsel for Janvey wrote in the response brief. “For all of these reasons, Stanford’s motions should be denied.”

The parties’ responses come more than a year after a Texas federal judge ruled in the commission’s favor, ordering Stanford to pay $6.76 billion for claims related to his alleged $7 billion securities fraud plot.

U.S. District Judge David C. Godbey ordered Stanford to pay $6.76 billion to the SEC, a sum that includes the $5.9 billion the agency was originally looking for, plus $861 million interest. The ruling also rejected Stanford’s earlier argument that he should be able to continue challenging the validity of the civil case, which is based on information from his criminal conviction, because he claims he didn’t get a full and fair opportunity to defend himself at trial.

The judge said the SEC was entitled to summary judgment because both the criminal and civil cases involve the same facts, which had already been litigated in the government’s favor during Stanford’s criminal proceedings.

Stanford was sentenced in March 2012 to 110 years in prison after being convicted on charges he misappropriated billions of dollars in investor funds, including some $1.6 billion he allegedly moved to a personal account.

All told, Stanford and his Houston-based company misused and misappropriated about $7 billion in certificates of deposit purchased by investors and administered by Stanford International Bank, according to the prosecutors.

The SEC went after him too, filing a suit in the Northern District of Texas basing its arguments on information from Stanford’s criminal conviction.

The SEC is represented by B. David Fraser and David B. Reece of the SEC.

Receiver Ralph S. Janvey is represented by Kevin M. Sadler, Scott D. Powers, David T. Arlington and Timothy S. Durst of Baker Botts LLP.

Robert Allen Stanford is representing himself.

The case is Securities and Exchange Commission v. Stanford International Bank Ltd. et al., case number 3:09-cv-00298, in the United States District Court for the Northern District of Texas, Dallas Division.

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Congress Needs to Act Now to Protect Investors from SIPC “Insurance”

On September 25, 2000, eight years before the scams of Bernard Madoff and R. Allen Stanford were uncovered, Gretchen Morgenson (financial journalist for the New York Times) wrote a perceptive column of exacting detail describing the Securities Investor Protection Corporation’s pinched and adversarial practices aimed at favoring the SIPC Fund over protecting innocent customers of failed broker dealers. That column was “dead on” concerning SIPC’s regrettable culture, in which litigation rather than protection is too often the order of the day.

As Comptroller of the Currency (our nation’s oldest bank supervisory agency) in the turbulent economy of the mid-70s, I worked closely with the FDIC in the resolution of many failed banks. The efficiency and fairness with which it fulfilled its guaranteed protection of depositors was always impressive. Equally admirable is its practice of reserving its considerable legal resources for recovery actions against wrongdoers-not the victimized customers.

It is a shame that none of us heeded Ms. Morgenson’s warning entitled, “INVESTOR BEWARE; Many Holes Weaken Safety Net for Victims of Failed Brokerages.” I feel particularly at fault, having had an active role in the enactment of the Securities Investor Protection Act in 1970. Then serving as Special Assistant for Legislative Affairs to Secretary of the Treasury David Kennedy, my associates and I worked in cooperation with the SEC, Congressional committee staffs, key Members of the House and Senate, and leaders of the securities industry to develop the statutory content of SIPA. We were moving expeditiously as the industry had suffered a rash of broker-dealer failures and we were gravely concerned that non-professional, rank and file investors were abandoning securities investment so extensively that the fundamental market function was vulnerable to complete collapse.

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For a full and open debate on the Stanford receivership visit the Stanford International Victims Group – SIVG official Forum http://sivg.org.ag/