KRCL Stanford Ponzi Scheme Litigation Update
February 28, 2013
By David M. Clem
It has been more than four years since the District Court for the Northern District of Texas appointed Ralph Janvey
as Receiver for the Stanford Entities-shutting down what the SEC alleged to be a $7 billion Ponzi scheme. In that
time, R. Allen Stanford and some of his associates have been tried and convicted in criminal courts, while hundreds
of civil lawsuits continue to creep forward. Most of the civil suits are consolidated for pretrial purposes into MDL
2099, in the Northern District of Texas. This litigation alert will briefly address the criminal convictions, followed
by an update on the SLUSA appeal that KRCL wrote about in April.[1] Lastly, this alert will report on some of the new
complaints filed by the Receiver and the Official Stanford Investors Committee in February.
The Criminal Trials
On June 14, 2012, Judge Hittner of the Southern District of Texas sentenced R. Allen Stanford to 110 years in federal
prison for various counts of fraud, conspiracy, and obstruction. The court also imposed a $5.9 billion judgment against
Stanford individually. Stanford has appealed the conviction to the Fifth Circuit Court of Appeals.
Stanford's conviction and judgment followed a six-week trial at which his former chief financial officer, James Davis,
testified against Stanford as part of a plea agreement. The court sentenced James Davis to five years in prison and
imposed a $1 billion money judgment.
Laura Pendergest-Holt, Stanford's former chief investment officer, plead guilty to obstruction and received a sentence
of 36 months in prison and no monetary judgment.
On February 14, 2013, the court sentenced Gilbert Lopez, Stanford's former chief accounting officer, and Mark Kuhrt,
the former controller, to 20 years in prison. These defendants have signaled their intentions to appeal.
The Lopez and Kuhrt sentences bring an end to the criminal trial proceedings, other than those related to Leroy King,
an Antiguan banking regulator whom prosecutors are attempting to extradite to the United States for trial.
The SLUSA Appeal
As we have previously written, the Securities Litigation Uniform Standards Act of 1998 ("SLUSA") prohibits state-based
securities class actions if the claims allege "a misrepresentation or omission of a material fact in connection with
the purchase of a covered security." Judge Godbey in the Northern District of Texas previously ruled that the
plaintiffs' claims, which related to CDs issued by Stanford International Bank, were sufficiently related to "covered
securities" to warrant SLUSA preemption.
On appeal, the Fifth Circuit reversed the district court, holding that SLUSA preemption does not apply and breathing
life back into the plaintiffs' claims.
Last month, the United States Supreme Court granted certiorari to review the SLUSA issue.[2] The Supreme Court granted
certiorari in spite of opposition from the Solicitor General, who wrote in an amicus brief that the facts presented
are too peculiar to provide any assistance to lower courts that may later face SLUSA preemption issues.
The Supreme Court will hear oral argument in the October 2013 Term. If the high court reverses the Fifth Circuit, the
plaintiffs' claims that are based on state law securities violations will be dismissed, significantly diminishing the
plaintiffs' ability to recover against financial services defendants.
The February 15 Lawsuits
The Official Stanford Investors Committee is a court-appointed group consisting of seven members that purportedly
represent a "cross-section of the Stanford victims' community." The Receiver assigned certain of its claims to the
Committee, which has brought suits in its own name and has also intervened in some lawsuits.
Despite the uncertainty created by the pending SLUSA appeal, the Committee has recently increased its litigation
activity. On February 15, 2013, the Committee filed three complaints with the MDL Court-a complaint in intervention
and two original complaints.
The Committee filed the complaint in intervention in Rotstain v. Trustmark National Bank, HSBC Bank PLC, The
Toronto-Dominion Bank, and Bank of Houston, No. 3:09-cv-2384. Rotstain is a purported class action brought by victims
of Stanford's purported Ponzi scheme. The Receiver and the Committee had previously intervened, but had not alleged
claims directly against the defendant banks until this filing. The Committee alleges various claims related to
fraudulent transfers, conversion, and conspiracy. The Committee also seeks punitive damages for the banks' alleged
participation or abetting of Stanford's fraudulent scheme.
On the same day, the Committee filed an original complaint styled The Official Stanford Investors Committee v. Bank of
Antigua, et al., No. 3:13-cv-0762. In this action, the Committee seeks recovery from eight foreign banks for claims
similar to those alleged in the Rotstain matter. The Committee alleges that the Antiguan government and its monetary
regulator, the Eastern Caribbean Central Bank, were complicit in and integral to Stanford's fraud. According to the
complaint, the Antiguan government's seizure of the Bank of Antigua (a Stanford-controlled entity) resulted in the
dissemination of Stanford assets to various Caribbean-based banks. The Committee seeks to recover these assets, alleged
to be in the tens or hundreds of millions of dollars, under theories of fraudulent transfer and conversion.
In addition, the Committee filed suit directly against the nation of Antigua and Barbuda, in a case styled The Official
Stanford Investors Committee v. Antigua and Barbuda, No. 3:13-cv-0760. In this Complaint, the Committee levies its most
serious accusations against the Antiguan government, alleging that the country "became a 'blood brother' to Stanford"
and that key government officials "were literally Stanford's partners in crime." By this action, the Committee seeks to
recover almost one hundred million dollars in unpaid loans made by Stanford to the government of Antigua and Barbuda.
The Receiver also filed a new lawsuit on February 15, 2013. In Janvey v. Pablo M. Alvarado, et al., No. 3:13-cv-0775,
the Receiver seeks to recover from 23 former directors and officers of various Stanford entities for breach of fiduciary
duty. The suit essentially alleges that the directors and officers either knew of the fraud or facilitated the fraud by
ignoring numerous "red flags." Laura Pendergest-Holt, Mark Kuhrt, and Gilberto Lopez are among the defendants.
KRCL will continue to monitor the Stanford litigation closely.
[1]
The Fifth Circuit Court of Appeals Revives Securities Fraud Claims in Stanford Entities Securities Litigation
[2]The consolidated cases are Chadbourne & Park LLP v. Troice, No. 12-79; Willis of Colorado, Inc. v. Troice, No. 12-86;
and Proskauer Rose LLP v. Troice, No. 12-88.
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