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Federal Judge Sides With Pershing in Stanford Ponzi Case

A federal judge Monday confirmed an arbitration award in favor of Pershing LLC, which retired investors claimed owed them $80 million from Allen Stanford’s $7 billion Ponzi scheme.

NEW ORLEANS (CN) – A federal judge Monday confirmed an arbitration award in favor of Pershing LLC, which retired investors claimed owed them $80 million from Allen Stanford’s $7 billion Ponzi scheme.

Eighty-five retirees filed their claim in 2013, saying Pershing, a division of Bank of New York Mellon Corp, had not represented their best interests and should have realized that Stanford was acting fraudulently.

H. Allen Stanford is serving a 110-year prison sentence for his March 2012 conviction of running a $7.2 billion Ponzi scheme.

U.S. District Judge Lance Africk ruled Monday that “an arbitration panel’s decision cannot be overturned simply because it was incorrect.”

He said that whether Pershing knew of Stanford’s fraudulent scheme or not does not have a bearing on the arbitration award. Pershing was a clearing broker for Stanford. The retirees accused it of failing to perform due diligence.

Africk gave Pershing until noon Thursday to propose judgment.

“A review of the record shows that Pershing produced a vast amount of material during the arbitration proceeding which evidenced that high-level Pershing employees were aware as early as 2006, to one degree or another, of potential ‘red flags’ regarding Stanford Group Company,” Africk wrote.

The scheme was based on cheating investors with fraudulent deposit receipts issued by Antigua-based Stanford International bank.

The Financial Industry Regulatory Authority arbitration panel issued its ruling in November 2014. FINRA did not explain its decision, which is typical in FINRA arbitration rulings.

The U.S. Supreme Court then ruled in February that investors in Stanford’s Ponzi scheme could sue lawyers, insurance brokers and others who worked with the swindler to try to reclaim losses.

“The Louisiana Retirees marshaled this evidence in support of their position that Pershing knew or should have known that there were serious questions about Stanford Group Company’s legitimacy during the period that the Ponzi scheme was in operation, and that Pershing should have done more sooner to raise the alarm regarding Stanford Group Company,” Africk wrote in his Monday ruling.

“The arbitration panel rejected the Louisiana Retirees’ arguments. There is no reasonable basis to suggest that if the new documents had been produced during the arbitration proceeding, the result would have been different.”

The primary focus of the arbitration was not whether Pershing had notice of suspicious behavior by Stanford Group Company, but rather whether Pershing acted reasonably to address their concerns, Africk said.

More importantly, even if Pershing did act unreasonably, the arbitration was to decide whether Pershing violated any legal duty owed to the Louisiana Retirees.

Pershing argued during the arbitration that Pershing could have no liability for fraud committed by Stanford Group Company even if Pershing should have discovered that fraud or done more to prevent it.

“Having reviewed the record, the recently produced documents, the briefs, and considering the applicable legal standard, the Court concludes that the deprivation of the newly produced documents during the arbitration process did not result in a fundamentally unfair proceeding,” Africk ruled.

He pointed out that the retirees felt good about the arbitration panel, and even thanked them for their time, until the panel ruled against them. Just such an occurrence is barred by the “waiver rule,” Africk found.

He said that arbitrations are usually binding but in rare instances – such as those of fraud or bias on the part of the panel – can be overturned by the court.

Africk found that even if Pershing did know Stanford’s investments were shoddy, that does not indicate the arbitration panel was biased or fraudulent.

“Finally, with respect to the alleged bias created by the FINRA defense, the Court finds the Louisiana Retirees’ characterization of the defense somewhat misleading,” Africk wrote. “This defense — one of many advanced by Pershing — was essentially a causation argument: Even if Pershing had notified the regulators of any concerns it had regarding Stanford Group Company, it would not have made a difference in terms of shutting down the Ponzi scheme because the regulators and law enforcement agencies already knew far more about Stanford Group Company than anything Pershing could have reported. However the defense is characterized, the Court is not at all convinced that Pershing’s assertion of a particular legal theory demonstrates that the arbitration panel was biased.”

Africk added that the Fifth Circuit has found an arbitration award cannot be overturned on the merits of a party’s claim alone.

Categories: Criminal

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