Reiterating its ruling from January 2019, the U.S. Court of Appeals for the Fifth Circuit Thursday once again ruled, in effect, that one of the largest investors in the $7 billion Stanford International Bank Ponzi scheme should not be allowed to keep $79 million it received before it crashed.
The opinion, reheard on the rebound from the Texas Supreme Court, is a clear win for Ralph Janvey, the court-appointed receiver who has been dealing with the wreckage of the $7 billion enterprise since its collapse in 2009.
In an opinion written by Circuit Judge Carl Stewart on behalf of a three-judge panel, the court rejected a request for a new trial to decide whether the investor had accepted the money refunded “in good faith.” The ruling all but ends the challenge at issue for the past 12 years.
Robert Allen Stanford, the Houston businessman behind Stanford International Bank, is currently serving a 110-year sentence in federal prison at Sumterville, Fla. Stanford, now 70, is scheduled for release in 2103.
As in the 2019 appellate ruling, the case pitted Janvey against billionaire Gary D. Magness, one of the largest investors in the bank run by Houston lawyer Allen Stanford. The issue involves $88 million in loans from Stanford made in 2008 — before the bank’s financial collapse, but after an investigation into Stanford and SIB became public knowledge.
The receiver sued Magness in Dallas federal court under the Texas Uniform Fraudulent Transfer Act in an attempt to recover the funds. The court granted a summary judgment that allowed Janvey to recover $9 million in profits Magness had gained from his investments but the issue of returning the $79 million to the receiver was left to a jury.
In 2017, the seven-member jury ruled in Magness’s favor, finding that he acted in good faith when he accepted the cash. But the jury also found that Magness was obligated to investigate whether Stanford was a Ponzi scheme.
The receiver’s lawyers argued that the finding was sufficient to negate Magness’s good faith. And in denying the motion, U.S. District Judge David Godbey ruled that any effort by Magness to fully investigate the Ponzi-scheme allegations would have been futile — relieving Magness of his responsibility to investigate as a “futility exception.”
In its January 2019 ruling, the Fifth Circuit took exception to Godbey’s exception, noting that a failure to inquire when on notice to do so “does not indicate good faith.”
But in May 2019, the Fifth Circuit vacated its ruling and certified a question to the Texas Supreme Court, asking whether a “good faith” defense to fraudulent clawback under TUFTA is available to a defendant who failed to investigate, even if such an investigation might prove futile. And in December the Texas Supreme Court answered in the negative.
“(A) transferee on inquiry notice of fraud cannot shield itself from TUFTA’s clawback provision without diligently investigating its initial suspicions (of fraud) — irrespective of whether a hypothetical investigation would reveal fraudulent conduct,” the Texas court wrote.
Although the Texas Supreme Court took no position on its application to Magness, and offered no guidance on what a diligent investigation would entail, the Fifth Circuit was satisfied that Magness had not qualified as an exception, either in the record, or under Texas law.
Where Magness argued that they had “reasonably” investigated their suspicions of fraud, the Fifth Circuit ruled they had not.
“Even assuming, without deciding, that ‘reasonably’ equates to ‘diligently’ for the purposes of TUFTA good faith, we are not persuaded by the Magness Parties’ argument,” Stewart wrote.
And on the issue of a new trial over the “good faith” issue, Stewart was even more blunt.
“Our inquiry here is not whether the Receiver and the Magness Parties had a right to have this case tried by a jury in the first instance. Rather, it is whether the Parties are entitled to another jury trial on a specific issue— whether they diligently investigated their initial suspicions of SIB’s Ponzi scheme while on inquiry notice—when the record indicates that no reasonable jury could find for the Parties on that issue.”
Sadler said Friday that he expects an appeal for rehearing.
“To postpone further the day of reckoning, the Magness parties will likely file a petition for rehearing, which is due in 14 days. We anticipate that effort will be unsuccessful. Once the case is returned to District Court, the Receiver will seek an award of attorneys’ fees and costs, which at this point total several million dollars.”