NEW ORLEANS (CN) - The 5th Circuit refused to thaw the assets of financial advisors and Stanford Group employees who are on trial over their roles in an alleged $8 billion Ponzi scheme.
"The assets that the receiver requests stay frozen are assets that are directly traceable to the Stanford Ponzi scheme and are the subject of this dispute," Judge Edward Prado wrote for the federal appeals panel. "The receiver merely asks that those assets continue to be held immovable while his case proceeds to judgment. We do not find that the district court erred in determining that a preliminary injunction was appropriate to protect against monetary asset dissipation."
The Securities and Exchange Commission sued Stanford Group, along with various other Stanford corporate entities including Stanford International Bank (SIB), in February 2009 for allegedly perpetrating the Ponzi scheme. Two months later, the SEC filed suit again against 66 Stanford "financial advisers."
The district court appointed Robert Janvey as receiver to marshal the Stanford estate, and the 5th Circuit ordered the lower court to thaw the frozen accounts of Stanford investors.
Janvey then obtained a preliminary injunction to continue a freeze on the accounts of numerous former financial advisors and Stanford Group employees pending the outcome of the trial.
The employee defendants asked the 5th Circuit to lift the injunction, which they say should not have been ordered while a motion to compel arbitration was pending. They also claimed the district court abused its discretion in granting the preliminary injunction, that the preliminary injunction was overbroad, that the injunction was really an improper writ of attachment, and that the receiver's claims are subject to arbitration.
The 5th Circuit affirmed the lower court's decision on all issues.
"The receiver is in an unenviable position: although the Stanford estate has many thousands of claimants, there are startlingly few assets to disperse to the Stanford victims," Prado wrote.
The three-judge panel found that the district court had the authority to grant an injunction before deciding the motion to compel arbitration, that it did not "overreach," and that Janvey had enough cause to secure a preliminary injunction.
"The district court did not err when it found, for the purposes of this preliminary injunction proceeding, that Stanford operated as a Ponzi scheme," Prado wrote.
The SEC claims that the Stanford Group committed the fraud for almost 15 years by selling certificates of deposit (CDs) issued by SIB, promising above-market returns and falsely assuring investors that the CDs were backed by safe, liquid investments.
At the time the SEC filed suit, Stanford should have held assets of greater than $7 billion, but actually held assets of less than $1 billion.
Though SIB claimed that it consistently earned high returns on its investments, the bank could not cover its liabilities and used new CD sales to make interest and redemption payments on pre-existing CDs.
The injunction is a necessary step for Janvey to recoup assets of the alleged Ponzi scheme, the ruling states.
Prado added that the lower court was correct to group all of the transactions rather than examining evidence of claims against individuals.
"The receiver's evidence is a spreadsheet ... that lists each former employee, the form of compensation (loan, commission, or quarterly bonus), and the amount that Stanford paid each employee," the ruling states (parentheses in original). "Stanford paid the employee defendants from the alleged Ponzi scheme for the purposes of the preliminary injunction proceeding."
Since Stanford was "grossly undercapitalized" when it entered receivership, Prado added that the interests of the receiver and creditors to achieve some sort of recovery outweigh those of the employee defendants.
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