DALLAS (CN) - Hundreds of investors who earned interest on the phony certificates of deposit in R. Allen Stanford's Ponzi scheme cannot keep those profits, a federal judge ruled.
In a 32-page order, U.S. District Judge David Godbey granted partial summary judgment to court-appointed receiver Ralph Janvey.
The Dallas attorney has launched several dozen federal complaints for disgorgement and fraudulent transfer against former Stanford entities and employees, individual investors, and recipients of Ponzi scheme proceeds, including Texas A&M University, the ATP Tour, the Miami Heat, the PGA Tour, the University of Miami, the Republican National Committee and the Democratic Congressional Campaign Committee.
"The court recognizes that forcing net winners to pay back interest payments will cause some pain," Godbey wrote. "But for victims of a Ponzi scheme, everyone is a loser. And the net winners will be in far better shape, having recovered at least their principal, than most Stanford victims, who lost everything."
He added: "Allowing net winners to keep their fraudulent above-market returns in addition to their principal would simply further victimize the true Stanford victims, whose money paid the fraudulent interest. Although other courts have sometimes disagreed, the court finds that avoiding the interest payments is the most equitable and just solution to a difficult problem."
Janvey applauded the decision and said in a statement that he plans to pursue at least 800 investors that collected more than $220 million in "fictitious interest."
This would compound the $55 million he has already collected.
"The receiver is pleased with the court's ruling today that those investors who profited from the Stanford Ponzi scheme do not have the right to retain those profits," Janvey said in a statement. "This decision represents an important milestone in the very long and difficult process of unwinding the massive Stanford Ponzi scheme."
Godbey concluded that investors have a legitimate claim for restitution of the principal they were fraudulently induced to lend in a Ponzi scheme.
They have no claim, however, to interest payments they received above that because contracts with Ponzi schemes are void and unenforceable, according to the ruling.
"Because the investors have a claim for their principal, those payments paid down an antecedent debt and, as such, were given for value," Godbey wrote. "Because the investors had no claim for interest, such payments were not given in exchange for value. Accordingly, the receiver may avoid the interest payments given in excess of the net winners' principal investments."
The investors failed to avert application of the Texas Uniform Fraudulent Transfer Act (UFTA) in lieu of the governing law of each investor's state or the laws of Antigua where Stanford International Bank (SIB) operated.
"The court finds that there is no conflict of laws between UFTA-enacting states and that the conflict between UFTA and Antiguan law is a false conflict," Godbey wrote. "Antigua has no actual interest in this dispute. The court recognizes that the Stanford investors, both creditors and net winners, purchased CDs from SIB, located in Antigua. But the court has already found that the Stanford Entities operated as a single entity, headquartered in Houston, Texas. Although the net winners purchased CDs from an Antiguan corporation, that corporation was a sham, existing solely to perpetuate a worldwide fraud. Antigua has no interest in applying its own law in such a scenario."
Although Antigua may have an interest in protecting its own citizens from the rescission of fraudulent transfers, none of the net winners have asserted their right as Antiguan citizens, Godbey noted.
Few, if any, investors were located in Antigua at all, according to the ruling.
In August, Godbey ruled against Nigel Hamilton-Smith and Peter Wastell, who were appointed receiver-managers of the SIB by the Eastern Caribbean Supreme Court in the High Court of Justice of Antigua and Barbuda in February of 2009.
The men asked Godbey to recognize them under Chapter 15 of the U.S. Bankruptcy code.
Godbey granted the joint liquidators only "foreign nonmain" recognition because he concluded the Stanford entities' "center of main interest" was the United States, not Antigua.
"Stanford employees managed and directed the [certificate of deposit] enterprise from the United States with no meaningful input from Antigua," Godbey wrote in August. "Although SIB, the issuing bank, was chartered and registered in Antigua, Stanford and [James] Davis controlled it - with assistance from [Laura] Pendergest-Holt - from various places within the United States ... Antiguan employees were excluded from decisions regarding SIB's self-professed primary business: CD-proceed investments."
Godbey limited the men's interviewing of witnesses and taking of evidence, citing their repeated interference with Janvey as being "the norm" and being "particularly worrying."
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