Stanford Investors Endure 'Living Hell' on Eve of Fraud Trial
By Andrew Harris and Laurel Brubaker Calkins – Jan 20, 2012 12:00 AM ET
R. Allen Stanford’s investors, after waiting three years to see the Texas financier go to trial on charges of leading a $7 billion fraud, must hold on even longer before learning when they will get some of their money back.
Stanford’s customers have received nothing since the U.S. Securities and Exchange Commission closed his businesses in February 2009.
Stanford, accused of misleading people who bought certificates of deposit from his Antigua-based bank, spent their money on bad investments, sports sponsorships and a lavish lifestyle that included yachts, a fleet of jets, mansions and a private Caribbean island, U.S. prosecutors said. Jury selection in his criminal trial is scheduled to start Jan. 23 in federal court in Houston. Stanford, who denies any wrongdoing, faces as long as 20 years in prison if convicted.
“It’s not fair that we have to be put through this living hell,” said Blaine Smith of Louisiana, who claims to have lost $1 million in life savings invested with Stanford.
A court-appointed receiver for Stanford Group Co. has spent at least $103 million on litigation, wind-down costs and other expenses, while collecting less than $212 million in cash and material assets since the SEC sued Stanford in February 2009.
The expenditures include fees and expenses for the primary outside law firm used by Ralph Janvey, the receiver. Janvey has asked court permission to pay Houston-based Baker Botts LLP (1143L) $21.3 million for work done from Feb. 17, 2009, to Sept. 30, 2011, according to court records.
Unlike Stanford, repayment processes have moved forward for claimants in the Bernard L. Madoff fraud case and the bankruptcy of MF Global Holdings Ltd. (MFGLQ), the parent of commodities broker MF Global Inc.
Madoff’s court-appointed liquidator, Irving Picard, has recovered $8.7 billion of the estimated $17 billion lost and has distributed $325.5 million to victims, according to his website. Madoff’s fraud ended when he was arrested in December 2008.
Customers of New York-based MF Global (MFGLQ), which collapsed in October, have already received $3.8 billion of the $6.5 billion they claim, according to that firm’s liquidation trustee, James Giddens.
An attorney for Janvey said last week that it’s too soon to say when investors may see some of the money.
“I know that’s frustrating,” said Janvey’s lawyer Kevin Sadler, a Baker Botts partner. “Investors want to know when and how much.”
Sadler and Janvey in November, under pressure by U.S. District Judge David Godbey in Dallas to start compensating investors, sought court permission to set up an investor repayment plan and establish a claim filing cut-off date.
Lack of Certainty
Sadler estimated that Stanford investors are owed about $5 billion in principal. Lack of certainty as to the total value of allowed claims and the amount of money available to pay them make putting a dollar value or even a ratio on the repayment rate impossible at this time, Sadler said.
On Nov. 11, the receiver submitted to Godbey a report stating it had $114.5 million in cash on hand and $96.6 million in other assets as of Oct. 31.
The largest known pot of Stanford assets is the financier’s foreign accounts, which are largely beyond Janvey’s reach.
Control of the $335 million to $350 million in European accounts was awarded by U.K. and Swiss courts to Stanford International Bank Ltd. liquidators appointed by an Antiguan branch of the Eastern Caribbean Supreme Court.
Edward Davis, the liquidators’ Miami lawyer, said in a phone interview this month that Stanford’s almost 22,000 global depositors could be paid as soon as the second quarter of this year.
His clients, Marcus Wide and Hugh Dickson, accountants in the global accounting firm Grant Thornton, on Jan. 18 announced the creation of claim-filing forms. Wide and Dickson were appointed to liquidate Stanford’s bank after the tribunal’s original choice, London-based Vantis Plc, collapsed. Wide is managing director of Grant Thornton (British Virgin Islands) Ltd. on Tortola and Dickson is a partner in Grant Thornton U.K. LLP, according to the Stanford bank liquidation website.
At current recovery levels, investors would receive about 10 percent of their money, more if the liquidators are able to invest small amounts of recovered funds to make it easier to sell some Stanford properties, Davis said.
To stop asset recovery and rehabilitation efforts to pay investors now, Davis said, “would be a horrible failure for the victims.”
Control of Assets
Wide and Dickson, using $20 million from frozen Stanford accounts advanced by a London court last year to fund their operations, have spent about $7.2 million to recover $148 million in cash and assets, Davis said.
They’re also sparring before Godbey, who last month heard arguments over whether Houston or Antigua should be declared the true “center of interest” of Stanford’s operations, which will determine which receiver gets control of the estate. An attempt to resolve that dispute through mediation failed.
“I’m sad to hear the mediation didn’t work,” the judge told the attorneys then. “I’m sadder that the money going to this to pay lawyers is not going to compensate the victims.”
In separate interviews, Sadler and Davis declined to specify the reasons for the lack of comity between their clients.
“We are still exploring ways in which we can reach an overall cooperative protocol,” and a means for avoiding duplicative efforts, Sadler said. “We have not reached that yet.”
“We tried to have a dialogue. We’ve gotten nowhere,” said Davis, “nowhere near a palatable deal.”
J. Samuel Tenenbaum, a Northwestern University law professor in Chicago, has been following the Madoff, Stanford and MF Global cases. He also directs the school’s Investor Protection Center, which assists those with limited income or small claims who are unable to obtain legal counsel.
Madoff’s fraud, he said, was easier to unwind because the stolen money remained within a defined circle of people where it could be identified and recovered.
“With Stanford, it’s more complicated,” said the professor, who is also affiliated with the Chicago firm Chuhak & Tecson. “He blew through the money. He either lost it or he spent it.”
In such cases, a coordinated global response is needed because otherwise recovery costs increase, Tenenbaum said.
“There should be one overall receiver for Allen Stanford,” he said.
The U.S. Securities Investor Protection Corp., or SIPC, had previously taken the position that the Stanford investors weren’t covered by its enabling Securities Investor Protection Act. SIPC committed to pay Madoff claimants almost $800 million, according to Picard’s website.
SIPC said in July that it would reconsider and make a final decision in September. That month passed without a ruling.
On Dec. 13, the SEC sued SIPC, seeking another path to aid the victims’ recovery. The SEC asked a federal judge in Washington for an order forcing the agency to create a claims process for Stanford’s alleged victims. A hearing is scheduled for Jan. 24.
Meanwhile, Stanford investor Blaine Smith, a custom-home builder, lost the house he built for himself in a foreclosure. His wife has postponed her retirement.
He searches for odd jobs and writes increasingly desperate e-mails to regulators and politicians he hopes can talk Stanford’s receiver into dropping clawback lawsuits against the investors, or persuade SIPC to cover his losses.
“We can’t take any more abuse,” he said.
The SEC case is Securities and Exchange Commission v. Stanford International Bank Ltd., 09-cv-00298, U.S. District Court, Northern District of Texas (Dallas). The criminal case is U.S. v. Stanford, 09-cr-00342, U.S. District Court, Southern District of Texas (Houston). The receivership jurisdiction case is In re Stanford International Bank Ltd., 3:09-cv-00721, U.S. District Court, Northern District of Texas (Dallas).
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