Stanford Case Update - STEP Caribbean Conference€™s (Ponzi) Scheme © 2013 Kobre & Kim LLP • USD10 billion over at least a decade (from 1999) • USD2 billion diverted to Allen

© 2013 Kobre & Kim LLP www.kobrekim.com

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Peter Tyers-Smtih, Barrister

Stanford Case Update

Kobre & Kim (BVI) LP • May 14, 2014


Route Map

• The Stanford Frauds

• A War of Recognition

• The Settlement Agreement

• The Law Firm Claims


2008


2012


• SIB issued Certificates of Deposit (‘CDs’)

• 3-4% higher than U.S. domestic banks

• Fraudulent misrepresentations as to investments, no loans policy, low risk profiling and high audit/regulation

• Actually placed into speculative, illiquid investments or diverted to Allen Stanford and/or other 100% owned entities

• Performance and investment data concocted by Allen Stanford and his inner-circle

• CD redemptions and interest payments made from subsequent depositors

Stanford’s (Ponzi) Scheme


• USD10 billion over at least a decade (from 1999)

• USD2 billion diverted to Allen Stanford and other 100% owned entities

• A Ponzi scheme hates a recession – collapse of 2008

• Couldn’t act alone – ‘inner-circle’ of 5 or 6 senior executives

• Leroy King – head of Antigua FSRC – blood oath

Stanford (Ponzi) Scheme (cont’d)


• Allen Stanford tried and convicted by a jury in Houston

• June 2012 - sentenced to 110-years

• ‘Inner-circle’ cohorts sentenced to a range of 5-20 years

• Causes célèbre – personal misappropriations USD2 billion, outsized lifestyle, maintained innocence, victim profiles.

• Velasquez v Stanford International Bank, 28 October 2013, Justice Wallbank : -

“a monstrous behemoth, demonically mendacious, with some serpentine subtlety calculated towards evading scrutiny, festering in its own corruption beneath a beautiful skin – until it inevitably imploded”

Stanford (Ponzi) Scheme (cont’d)


Recognition within the US of a foreign (non-US) liquidation

A War of Recognition

• Applications under Chapter 15 of the US Bankruptcy Code for recognition of ‘foreign main proceedings’ possible since 2006 (created in 2005 by US legislation on cross-border insolvency):

• Re: Fairfield Sentry (440 B.R. 60 Bankr. S.D.N.Y 2010) BVI recognised as ‘foreign main’ - feeder fund into Madoff Ponzi scheme, so activity had ceased 18 months prior to recognition application being made.


“In any proceeding for foreign recognition, of great concern to the Court is the potential for potential mischief and COMI manipulation …during this key period between December 2008 and the BVI liquidation proceedings the Debtors’ administrative nerve center existed in the BVI… Accordingly, and bearing in mind that “non-recognition where recognition is due may forestall needed inter-nation cooperation,”… the Petition for recognition of the BVI Liquidation Proceedings as a foreign main proceeding is hereby granted”

Judge Burton Lifland


Locations of (some….) of the Stanford litigation

US (Texas)

Antigua

UK Canada (Quebec)

Switzerland


2009 – February to May

• US Securities & Exchange Commission investigation and freezing Orders

• US Criminal Investigation

• US Receiver appointed (and US injunction granted against other proceedings) at SEC request

• Eastern Caribbean Supreme Court (Antigua & Barbuda) Receiver-Managers appointed and later as Joint-Liquidators

• US Receiver tries and fails to intervene in the ECSC proceedings

• US Receiver obtains Freezing Order (civil) in England

• US Mutual Legal Assistance Treaty request to the UK (Department of Justice, Criminal Division to Serious Fraud Office), ex parte Restraint Order (criminal judge not informed of civil injunction of 10 days earlier)


2009 May - September

• Antigua Joint Liquidators (“JLs”) apply for a Recognition Order from the English Court – the race to become the “Foreign Main Proceeding” - crucial in the ensuing cross-border insolvency

• Less than 2 weeks later, the US Receiver issues the same type of application for a Recognition Order

• JLs apply in Texas District Court for Chapter 15 recognition

• English High Court grants Recognition Order to the JLs, leading to discharge of the US Receiver’s English freezing Order

• Application by the JLs to vary the (criminal) Restrain Order fails


2009 September - December

• Not all plain-sailing for the JLs: Superior Court of Quebec

• Sought Recognition Order (opposed by US Receiver)

• Intervener the Quebec financial services regulator

• US Receiver recognised as the foreign representative

• The JLs failed (in their previous ex parte application for recognition as Receiver-managers):

– To tell the Court of the US Receivership

– To give regulator (and US Receiver) notice of the application

– Copied electronic data, removed all copies to Antigua and then deleted all electronic copies in Canada

– Refused to provide copies of the electronic data to regulator and US Receiver


2010 – February

• English Court of Appeal:

– (1) US Receiver’s appeal in respect of their Recognition Order having been refused

– (2) US Receiver’s appeal in respect of the Antiguan liquidation Recognition Order having been allowed

– (3) the SFO’s appeal (on behalf of the US Dept of Justice) in respect of aspects of the Recognition Order decision

– (4) the JLs’ appeal in respect of the E&W Restraint Order


English Court of Appeal

• Antigua liquidation the foreign main proceeding on the basis of Antigua being SIB’s COMI

• COMI ‘generally equates with the concept of a principal place of business in United States law’

• COMI:

– Presumed COMI is the jurisdiction of Registered Office

– Office premises and 88 employees in Antigua

– Public disclosure statements

– Regulation in Antigua (and not elsewhere)

– Bulk of the investors outside of the US

– Management expenses in the audited financials (US$147m in 2007)


“It is our duty to decide these appeals but I share the regret expressed by Jack J, HH Judge Kramer QC and Lewison J that the dividends ultimately distributed to the investors in the CDs issued by SIB are likely to have been substantially eroded by the costs involved in these disputes between three public bodies as to which of them should be responsible for collecting and distributing the assets of SIB”

Sir Andrew Morritt C


2010 February-June

• US Receivership proceedings suspended for settlement talks US Receiver/JLs

• June 2010 Swiss Financial Market Supervisory Authority recognise the JLs as appropriate foreign representatives of SIB (and dismiss equivalent application for recognition from US Receiver)

• June 2010 former JLs removed (remained as ‘stewards’ until 12/5/11). The writing had been on the wall since the Quebec decision

• 12/5/11 current Antiguan JLs installed


2011 June-December

• Once installed, subsequently able to access funds in English bank accounts by way of variation of UK Restraint Order

• JLs granted limited recognition in Quebec so as to sue a bank in Quebec (Toronto Dominion, ‘dishonest assistance’)

• Preparation for oral hearing in Texas for JLs’ application for Chapter 15 Recognition

– Evidence from retired Court of Appeal judge for the Eastern Caribbean as to applicable legal system (Antigua and Barbuda), independence of judges, appeal system

– Evidence of legal system (insolvency), access to court documentation, reciprocal enforcement of judgments


The JLs’ Chapter 15 evidence

– Extent to which there was meaningful commercial activity in Antigua (as opposed to the US)

– Location of creditors to SIB (US represented 15.74% of the total customers, 22.21% of the total amount on deposit as compared to Latin America 71.17% of the total customers and 58.56% of the total money on deposit)

– Account opening documentation has choice of law provisions relating to Antigua and Barbuda

– JLs offer to seek permission from Antiguan Court to share sufficient confidential information with the US Receiver for US Receiver to perform a role as Receiver


• Heavy reliance by US Receiver on Texas (Houston) link. Simple theory – the entire Stanford Financial Group including all 130 corporate entities were really just Allen Stanford, a native Texan tried and convicted of egregious fraud in Texas.

• Stanford Financial Group used heavily in marketing

• Extent to which SIB solicited deposits in 50 States of the US

• US Receiver sought 37 findings of fact, 14 conclusions of law and a permanent injunction against the Antiguan liquidators proceeding

The Receiver’s case


US Congress get involved…

8/12/11 Bill

• To suspend US aid to Antiguan government

• To vote within the World Bank and International Monetary Fund in favour of making loans to Antigua conditional on the Antiguan government recognising the US Receivership

• The Bill expressly references the Antiguan Joint Liquidators as the appointees of the Antiguan Government


Receiver’s proposed conclusions

Conclusions 9 and 14

No.9:

“Principals of comity are not relevant to the Court’s COMI determination. The Court is not bound by any contrary rulings of authorities in foreign jurisdictions, and the Court declines to apply the findings of fact or conclusions of law of the authorities in the United Kingdom, Switzerland, or Antigua”

No. 14

“Recognising the Antiguan Proceeding under Chapter 15 would be manifestly contrary to the public policy of the United States”


• JL’s refused recognition as foreign main

• Corporate veil pierced – all entities aggregated

• Detailed review of multi-jurisdictional jurisprudence

• JLs runner-up foreign non-main with stringent conditions and a severe down-dressing for ‘interfering’ with the U.S Receivership.

• At this stage Receiver had recovered $217 million of which $112 million spent on his own costs and expenses

Judge Godbey Rules 30/07/12


• Notice of appeal filed 7/8/12

• Final resolution predicted to be ‘years away’

• Resolution by consent looked unlikely

• By 8 April 2013 the Receiver, the JLs and all other parties concerned reached an agreement on all issues in a 75-page Settlement Agreement and Cross-border Protocol.

The JLs Appeal to the Fifth Circuit


• Requires ‘broad co-operation’

• Claims & Distribution Protocol

• Litigation Protocol

• Information Sharing Protocol

The Settlement Agreement


• Law Firm Claims – independently pursued, professional negligence, aiding and abetting and conspiracy – i.e. claims already afoot to continue such as Receiver’s claims against various law firms (commenced January 2013) – nothing on the face of the Settlement Agreement precluding JLs from suing same law firms in Antigua

• Bank Claims – independently pursued, negligence, aiding and abetting, dishonest assistance and conspiracy. JLs claim against Toronto Dominion Bank continues

• Clawback Claims – pursued in coordination to recover redemption payments in excess of capital i.e. fictitious interest payments stolen from ‘Peter’s’ capital to pay ‘Paul.’ Antigua – no specific office-holder avoidance of prior transactions legislation.

• Information Sharing - parties obliged to provide to one another unrestricted access to discovery materials and to take steps to obtain orders for discovery even in respect of documents subject to usual restrictions

Litigation Protocol and Information Sharing Protocol


• Settlement Agreement required approval by U.S. and Antiguan Courts

• Hearing in Texas 11 April 2013

• Objections raised by the law firms already the subject of Receiver’s lawsuit

• Litigation Protocol permits duplicative claims – answer twice for same alleged behaviour

• Information protocol permits duplicative discovery processes

• Settlement Agreement approved in full in U.S. and Antigua

Objections


• Federal Court pleading practice – long argumentative narratives

• Several causes of action raised – primary count is ‘professional negligence’

• Theory - with actual knowledge of the underlying frauds and unlawful conduct or with reckless indifference to ‘red-flags’ pointing to such frauds and unlawful conduct, in breach of their duties to Stanford Financial, Chadbourne and Proskauer’s conduct of Stanford Financial’s response to and defence of SEC investigation delayed and obstructed the SEC investigation, which enabled Allen Stanford and his inner-circle to misappropriate billions of dollars from Stanford Financial.

The Law Firm Claims – U.S./Antigua Comparison


• September and November 2013, the JLs issue proceedings against the same law firms in the name of SIB

• Publicly available filings indicate the JLs claim is for a sum in excess of $1 billion and is also based on professional liability

• Last month, the JLs obtained permission to serve out of Antigua

• Are the claims duplicative and if so what is the likely outcome?

Continued


• There is no meaningful difference between a U.S. and Antiguan professional liability claim: -

- existence of (usually concurrent) contractual/tortious duties

- breach of those duties

- causing proximate or foreseeable loss

• It seems highly likely that the factual pattern will be the same in Antigua as relied on by the Receiver in the Texas Complaint

• Seems inevitable that a challenge will be made in one if not both Jurisdictions to dismiss or stay one of the claims as an abuse of process

The Law Firm Claims – Duplication


• Question is whether the issues are identical regardless of how they are framed

• Duplication of substantial expense

• Conflicting decisions

• Recipe for confusion and injustice – ‘comity demands that such a situation should not be permitted to occur as between Courts of two civilized and friendly states’

Pacific Cable & Wire Co Ltd v Texan Management Ltd BVIHCV2005/0140


• ‘illegality defence’ – public policy – court will not lend its aid to a man who bases his cause of action on an illegal act

• Careful pleading will not assist – “the principle applies when the claimant's claim is so closely connected or inextricably bound up with his own criminal or illegal conduct that the court could not permit him to recover without appearing to condone that conduct” (Cross v Kirkby)

• Stone & Rolls Ltd v Moore Stephens (a firm) [2009] UKHL

The Law Firm Claims – Antigua ex turpi causa


• Therefore if ‘Stanford Financial’ (by the Receiver) or SIB (by the JLS) are in fact seeking to recover damages for the adverse consequences of those entities having engaged in wrongdoing for which they are primarily responsible, ex turpi is likely to apply

• Attribution of Knowledge and Conduct – the adverse interest exception

• The Victim Theory and Allen Stanford’s misappropriations from SIB

- Chapter 15 reasoning means SIB and all other corporate entities are aggregated to Allen Stanford himself

- SIB clearly perpetrated a fraud on its CD victims which is inextricably connected to Allen Stanford’s misappropriations

- Sole or dominant actor exception to the adverse interest exception

Ex turpi (cont’d)


• The foregoing analysis also raises further difficult questions unrelated to ex turpi, in particular: -

• when an attorney acts for a corporate client, their duties are owed to the company for the benefit of the shareholders; in this case Allen Stanford - how the delay and obstruction of the SEC’s investigation caused by Chadbourne and Proskauer’s conduct was a breach of their duties owed to Stanford Financial/SIB for the benefit of Allen Stanford.

• The issue is compounded by the more fundamental fact that SIB only ever held the proceeds of its own fraudulent conduct; accordingly if it never legitimately acquired anything it cannot realistically be said to have suffered any loss.

The Law Firm Claims – other obstacles

Documents

Stanford Case Update - STEP Caribbean Conference€™s (Ponzi) Scheme © 2013 Kobre & Kim LLP • USD10 billion over at least a decade (from 1999) • USD2 billion diverted to Allen