The U.S. Court of Appeals for the Fifth Circuit has reversed a trial court ruling that determined one of infamous Ponzi schemer Allen Stanford’s largest investors received a $79 million fraudulent transfer in good faith.
The opinion is the latest win for Ralph S. Janvey, the court-appointed receiver who has been behind the never-ending litigation that erupted from the fall of Stanford’s Ponzi scheme in 2009.
“The outcome in the Fifth Circuit is a significant accomplishment for the receiver in his ongoing effort to return as much as possible of the defrauded amounts to the victims of Stanford’s Ponzi scheme,” said Baker Botts partner Kevin Sadler, the lead lawyer for Janvey.
The case pits Janvey against billionaire Gary D. Magness, one of the largest investors in the Stanford Ponzi scheme. In the fall of 2008, right before the Ponzi scheme’s collapse, Magness obtained a series of “loans” against his Stanford certificates of deposit, through which he was able to secure $88 million from Stanford, which exceeded his original $79 million investment.
The receiver sued Magness in Dallas federal court under the Texas Uniform Fraudulent Transfer Act in an attempt to recover the $88 million that Magness received from Stanford. The court granted a summary judgment that allowed Janvey to recover Magness’s $9 million profit, but left it up to a jury to determine whether Magness would have to return the remaining $79 million.
The seven-member jury ruled in Magness’s favor in 2017, finding that he acted in good faith, allowing him to keep the money. But the jury also found that Magness was on inquiry notice that Stanford was a Ponzi scheme, so Janvey’s lawyers argued to U.S. District Judge David Godbey that finding was enough to negate Magness’s good faith.
Judge Godbey denied that request, ruling there was a “futility exception” – in other words, even though the jury found that Magness received notice of the scheme, it would have been futile for him to attempt to investigate it.
But in a 10-page ruling issued last Thursday, a three-judge panel at the Fifth Circuit didn’t buy into the futility excuse and reversed the $79 million judgment.
“Regardless of the intricate nature of a fraud or scheme, failing to inquire when on inquiry notice does not indicate good faith,” Chief Judge Carl Stewart wrote.
Magness’ lead attorney, Andrew Petrie of Ballard Spahr, said his side believes “the panel’s opinion is a departure from the approach five other circuit courts of appeal have taken.”
“We will be asking the Fifth Circuit for a rehearing,” he said.
When the case goes back to the trial court, Janvey’s lawyers will seek an award of prejudgment interest and attorneys’ fees, which could boost the final judgment up to $100 million.
Others on Janvey’s legal team from Baker Botts’ Austin office include Austin partner Evan Young, who argued the appeal; partner Scott Powers, who was second chair at trial; special counsel Brendan Day; associates Wade Allison, Grayson McDaniel and Ashley Allen Carr; and litigation specialist Lynne Dodge.