A three-judge panel of the U.S. Court of Appeals for the Fifth Circuit has invalidated a $65 million settlement agreement in 2016 between the court-appointed receiver in the Allen Stanford Ponzi scheme case and the insurance providers for Stanford directors, officers and employees.
In a 3-0 opinion issued late Monday, the Fifth Circuit panel ruled that U.S. District Judge David Godbey of Dallas and receiver Ralph Janvey overstepped their authority in a global settlement agreement that barred some individuals and entities targeted by the receiver from seeking financial claims from the insurance companies.
The settlement terms also gave the receiver a legally unfair advantage over the Stanford officials and “problems cast grave doubt on the fairness and equity of the settlement,” the court ruled.
Baker Botts partner Kevin Sadler, who represents Janvey, told The Texas Lawbook Monday night that the receiver is considering whether to appeal because they believe Judge Godbey “acted well within his discretion” when he approved the settlement.
“Yet once again, recovery for the Stanford victims, which has been delayed for years, is being subjected to even more lengthy delays,” Sadler said. “It is especially regrettable that the interests of the former Stanford executives and financial advisors have been elevated over the rights of the Stanford victims.”
It was exactly a decade ago today when Stanford, a Houston financier and chairman of the now-defunct Houston-based Stanford Financial Group, was arrested by federal authorities for operating a massive $7 billion fraud that victimized thousands of investors. In 2012, a Houston jury convicted Stanford of masterminding the scheme. He is serving a 110-year prison sentence.
The U.S. Securities and Exchange Commission filed the initial allegations against Stanford and asked a federal judge to freeze his assets. The federal court appointed Janvey as the receiver and gave him the mission of recouping monetary losses for those who were victimized by the Stanford’s fraud. Janvey reported last month that he has recovered $573 million for victims.
In June 2016, Janvey reached a settlement agreement with the insurance carriers, including Lloyd’s of London, which added $65 million to the fund.
To get the insurance companies to sign off on the settlement, Janvey agreed to include provisions that barred Stanford officers, directors and employees in Janvey’s crosshairs from making claims with those insurance companies.
Two groups of Stanford directors, managers and employees argued that the settlement unfairly stripped them of their legal rights to make a claim and asked the Fifth Circuit to reject it.
In a 31-page opinion, Judge Edith Jones wrote that Judge Godbey “lacked authority to approve” the settlement because it “nullified the coinsureds’ claims to the policy proceeds without an alternative compensation scheme” and released claims that Janvey “did not possess and barred suits that could not result in judgments against proceeds of the Underwriters’ policies or other receivership assets.”
“Barring appellants’ claims to coverage under their insurance policies by claiming the proceeds of these policies as property of the receivership, and then barring appellants’ from accessing even a portion of these proceeds through the receivership claim process, undermines the fairness of the settlement,” Judge Jones wrote.
Judge Jones, who was joined in the opinion by Judge Edith Brown Clement and Judge Leslie Southwick, said Judge Godbey and Janvey believed that the settlement terms were “for the sake of the greater good,” but they went too far in “dispossessing claimants of their legal rights to share in receivership assets.”
“Of course, the receiver and underwriters were, as appellants’ counsel colorfully described, all too happy to compromise at the expense of appellants’ rights,” Judge Jones wrote.
“The court purported to justify this result by claiming that ‘the bar orders are not settling claims, they are enjoining them.’ No matter the euphemism, a permanent bar order is a death knell intended to extinguish the claims, which are a property interest, however valued, of the appellants,” the Fifth Circuit panel concluded.
Judge Jones said that the trial court “overlooked problems inherent in the settling parties’ positions.”
“The receiver was enabled by the settlement and bar orders to place appellants in a vise: preserving his ability to sue appellants for clawbacks even as the agreement stripped appellants’ access to any recompense from the underwriter,” the opinion stated.