Three federal appeals court judges in New Orleans got it all wrong six weeks ago when they invalidated a $65 million settlement in the eight-year litigation battle over the Allen Stanford Ponzi scheme, according to motions filed late Wednesday.
Lawyers for the court-appointed receiver seeking to recover money for victims of the $7 billion Stanford fraud argue that a panel of the U.S. Court of Appeals for the Fifth Circuit “engaged in independent erroneous fact finding” and ignored established precedent when it rejected a carefully negotiated and district judge-approved settlement agreement in June.
Ralph Janvey, the receiver, and his lawyers claim the three-judge appellate panel – Judge Edith Jones, Judge Edith Brown Clement and Judge Leslie Southwick – “openly expressed hostility to the receiver’s claims” and “impugned the parties’ motives without any support for these accusations in the record.”
Lawyers for Janvey also argue that the three-judge panel improperly relied on limitations applied to bankruptcy matters to place jurisdictional limitations on how district courts handle this kind of financial recovery effort by receivers in fraud cases.
“Uncorrected, the panel opinion will substantially undermine receivership courts’ ability to protect estate property in this circuit, presenting an issue of exceptional importance,” Baker Botts partners Kevin Sadler and Scott Powers, who represent Janvey, wrote in the petition asking the full Fifth Circuit to hear the appeal en banc.
In June 2009, 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 more than 18,000 investors.
In 2012, a Houston jury convicted Stanford of masterminding the scheme. He is now 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 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 the Stanford officers, directors and employees in Janvey’s crosshairs from making claims with those insurance companies.
U.S. District Judge David Godbey, after multiple hearings, approved the settlement agreement.
Two groups of Stanford directors, managers and employees argued that the settlement unfairly stripped them of their legal rights to make claims and asked the Fifth Circuit to reject it.
In a 31-page opinion issued on June 17, Judge 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.”
In asking the full Fifth Circuit to reconsider the opinion of the three judges, Janvey argues that the “panel erroneously claims its view is consistent with” prior precedents.
“The panel opinion breaks new ground but fails to grapple with the consequences of limiting receivership court’s jurisdiction, amplifying the need for the full court’s review,” Sadler and Powers wrote. “Such weakening of the receivership court’s authority to protect the estate warrants rehearing by the en banc court.”
Janvey argues that the three-judge panel’s ruling improperly “curtails the discretionary authority” of district judges to enter bar orders.
“The panel significantly deviated from the proper abuse-of-discretion standard by engaging in independent fact-finding, openly expressing hostility to the receiver’s claims that were not before the panel, and impugning the parties’ motives without any support for these accusations in the record,” according to Sadler and Powers. “Then – ignoring the finding that the settlement was in good faith and without citing any record support – the panel repeatedly accused the receiver and underwriters of improper motives.”
“The panel opinion also repeatedly and derisively refers to the attorneys’ fees awarded, even though no one objected to them,” Janvey and his lawyers argue. “Receiver’s counsel worked on contingency to prosecute the receiver’s claims and, after negotiating the $65 million recovery, agreed to a significantly smaller percentage than originally negotiated.”
In a separate but related petition, lawyers for Lloyds of London and other insurance underwriters joined Janvey in asking the full Fifth Circuit to reconsider the three-judge panel’s decision in order to “maintain the uniformity of the court’s decisions and to consider questions of exceptional importance.
The underwriters argue that the Fifth Circuit panel’s opinion was “erroneous and conflicts with the decisions from this court, its sister circuits and numerous district courts.”
Lloyds and the underwriters are represented by Manuel Mungia Jr. and Matthew Pepping of Chasnoff Mungia Pepping & Stribling of San Antonio.