(CN) – The Fifth Circuit found a district court lacked authority to approve a global settlement between the receiver appointed over Stanford International Bank and insurance underwriters after the collapse of R. Allen Stanford’s $5 billion Ponzi scheme.
In the Securities and Exchange Commission’s securities fraud suit against Stanford, the district court appointed Ralph Janvey as a receiver “to immediately take and have complete and exclusive control,” in order find and reclaim money that the scheme paid to “winning investors” and others for the benefit of defrauded investors.
According to the ruling, the receiver’s global settlement approved by the district court “nullified the co-insureds’ claims to the policy proceeds without an alternative compensation scheme.”
The policy underwriters argued that only $46 million remains available because the losses resulted from the Ponzi scheme. The receiver, however, claimed that the conduct “implicates the aggregate loss limits up to $101 million of remaining coverage,” the ruling states.
After eight years, the receiver, underwriters and an examiner on behalf of Stanford investors mediated their disputes, culminating in a settlement with underwriters agreeing to pay the receiver $65 million and in return the receiver would “fully release any and all insureds under the relevant policies,” according to the ruling.
“The settlement yielded $65 million for the receiver’s claims against the insurance policy proceeds, but it wipes out, through ‘bar orders,’ claims by co-insureds to the policy proceeds and their extracontractual claims against the underwriters even if such claims would not reduce or affect the policies’ coverage limits,” Judge Edith H. Jones wrote in the 31-page ruling.
“A constellation of issues surrounding the global settlement is encapsulated in the question whether the district court abused its discretion in approving the settlement and bar orders,” Judge Jones wrote. “Based on the nature of in rem jurisdiction and the limitations on the court’s and receiver’s equitable power, we conclude the district court lacked authority to approve the receiver’s settlement.”