SOUTHWICK, LESLIE H.

JONES, EDITH H.

CLEMENT, EDITH B.

Stanford receiver: Fifth Circuit judges ‘erroneous’ in invalidating $65M Ponzi settlement

The decade-long legal battle by federal officials to recover money for victims wronged in the $7 billion Ponzi scheme engineered by Houston financier Allen Stanford took another major twist late last month when lawyers for the court-appointed receiver asked a federal appeals court to reinstate a $65 million settlement agreement with insurance companies.

Ralph Janvey, the receiver, argued that a three-judge panel of the U.S. Court Court of Appeals for the Fifth Circuit “engaged in independent erroneous fact finding” and ignored established precedent when it rejected in June a carefully negotiated — and district judge-approved — settlement agreement with Lloyds of London and other underwriters that provided insurance coverage for Stanford and his operation.

Lawyers at Houston-based Baker Botts, who represent Janvey, claim the federal appellate judges “openly expressed hostility to the receiver’s claims” and “impugned the parties’ motives without any support for these accusations in the record.”

Baker Botts partners Kevin Sadler and Scott Powers, in a stinging rebuke of the three-judge panel’s decision, asked the full Fifth Circuit to reconsider the case and reverse the panel’s ruling.

“Uncorrected, the panel opinion will substantially undermine receivership courts’ ability to protect estate property in this circuit, presenting an issue of exceptional importance,” Sadler and Powers state in court documents.

Assets frozen

Stanford, chairman of the now-defunct Houston-based Stanford Financial Group, was arrested in June 2009 by federal authorities for operating a massive $7 billion fraud that victimized more than 18,000 investors. In 2012, a Houston jury convicted him of masterminding the scheme. He is serving a 110-year prison sentence.

The U.S. Securities and Exchange Commission filed the initial allegations against Stanford and asked a federal judge to freeze his assets.

What does the Court of Appeals for the Fifth Circuit, Louisiana and the American Civil War Have in Common?

The federal court appointed Janvey as receiver and gave him the mission of recouping monetary losses for those victimized by the fraud.

Janvey reported in May that he had recovered $573 million for victims. He reached a settlement agreement with the insurance carriers, including Lloyd’s of London, in June 2016 that added $65 million to the fund. To get the insurance companies to sign off on the settlement, Janvey agreed to include provisions that barred Stanford officers, directors and employees in Janvey’s crosshairs from making claims with those insurance companies.

U.S. District Judge David Godbey of Dallas, after multiple hearings, approved the settlement agreement.

Two groups of Stanford directors, managers and employees argued that the settlement unfairly stripped them of their legal rights to make claims against the insurance companies and asked the Fifth Circuit to reject it.

A three-judge panel of the New Orleans-based federal appeals court ruled June 17 that Godbey “lacked authority to approve” the settlement because it “nullified the coinsureds’ claims to the policy proceeds without an alternative compensation scheme.”

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Fees are cut

In asking the full Fifth Circuit to reconsider the opinion of the three judges, Janvey argued that the “panel erroneously claims its view is consistent with” precedent.

“The panel opinion breaks new ground but fails to grapple with the consequences of limiting receivership court’s jurisdiction, amplifying the need for the full court’s review,” Sadler and Powers wrote.

Janvey argued that the three-judge panel improperly “curtails the discretionary authority” of district judges to enter bar orders. The appeals court “significantly deviated” from prior precedent and improperly “ignored the finding” by Judge Godbey that “the settlement was in good faith and without citing any record support — the panel repeatedly accused the receiver and underwriters of improper motives,” his filing says.

“The panel opinion also repeatedly and derisively refers to the attorneys’ fees awarded, even though no one objected to them,” Janvey and his lawyers argued.

“Receiver’s counsel worked on contingency to prosecute the receiver’s claims and, after negotiating the $65 million recovery, agreed to a significantly smaller percentage than originally negotiated.”

Lawyers for those opposing the settlement agreement are expected to file their arguments next month. It could be several months before the full Fifth Circuit decides whether to grant the appeal.