Avoidance and Recovery
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Avoidance and Recovery
From the Fifth Circuit Court of Appeals, a recent decision regarding the curious (and well-aged) bankruptcy of Yuval Ran offers a thought-provoking consideration of what is required to obtain US recognition of a foreign individualâs bankruptcy case.
The Curious Case of Mr. Ran
Mr. Ran, an Israeli citizen, was at one point a director or shareholder in almost one hundred Israeli companies â some publicly-traded, and the largest of which was Israel Credit Lines Supplementary Financial Services Ltd. (âCredit Linesâ), a public company co-founded and run by Ran, who served as CEO.
After raising millions of dollars from investors and acquiring interests in numerous other companies, Credit Lines ultimately found itself in liquidation through an Israeli bankruptcy proceeding. Credit Linesâ bankruptcy receiver asserted claims against Ran for millions of dollars in damages.
In June 1997, an involuntary bankruptcy proceeding was commenced against Ran in the Israeli District Court of Tel Aviv-Jaffa â but not before Ran and his family had departed Israel for Houston, Texas. Since their departure, Ran and his wife purchased a home and went to work for a local furniture company. Ranâs wife and five children are US citizens, and Ran himself is a permanent resident seeking US citizenship. With the exception of some minimal collection work on Credit Linesâ behalf shortly after he arrived in the US, Ran did no further business in Israel.
In December 2006 â nearly a decade after Ran and his family emigrated, and more than eight years after being appointed receiver of Ranâs estate â Zuriel Lavie, the receiver appointed for Ranâs Israeli assets, sought recognition of the Israeli bankruptcy proceeding as a foreign main or non-main proceeding under Chapter 15 of the Bankruptcy Code in the Southern District of Texasâ Bankruptcy Court.
Levieâs petition was denied the following May. After two rounds of appeals to the District Court, the parties finally found themselves before the Fifth Circuit Court of Appeals.
In affirming the District Court and the Bankruptcy Courtâs denials, the Fifth Circuit briefly reviewed the procedural requirements for recognition set forth in Section 1517 of the Bankruptcy Code, then turned its attention to the one item of substance â whether the debtorâs bankruptcy proceeding qualified either as a foreign âmainâ or ânon-mainâ proceeding as contemplated by Chapter 15.
âMain Proceedingâ â Where is COMI?
Under US law â as under the UNCITRAL Model Law upon which it is based â a foreign âmain proceedingâ qualifies as such if the jurisdiction where it is pending is the debtorâs âcenter of main interestsâ (COMI). In the case of an individual such as Ran, COMI is presumptively the debtorâs âplace of habitual residenceâ â a concept roughly equivalent to the debtorâs âdomicile,â or physical presence coupled with an intent to remain there. One acquires a âdomicile of originâ at birth, and that domicile continues until a new one (a âdomicile of choiceâ) is acquired.
A similar concept â that of âhabitual residenceâ â likewise applies under foreign law when the individual intends to stay in a specified location permanently. Factors pertinent to establishing an individualâs âhabitual residenceâ include: (1) the length of time spent in the location; (2) the occupational or familial ties to the area; and (3) the location of the individualâs regular activities, jobs, assets, investments, clubs, unions, and institutions of which he is a member.
Under these facts, Ranâs COMI was presumptively in the US â and not in Israel. However, the presumption of COMI may be rebutted. Levie sought to do so by introducing evidence at the District Court that: (1) Ranâs creditors are located in Israel; (2) Ranâs principal assets are being administered in bankruptcy pending in Israel; and (3) Ranâs bankruptcy proceedings initiated in Israel and would be governed by Israeli law.
Ran countered by pointing out that: (1) Ran along with his family left Israel nearly a decade prior to the filing of the Chapter 15 petition; (2) Ran has no intent to return to Israel; (3) Ran has established employment and a residence in Houston, Texas; (4) Ran is a permanent legal resident of the United States and his children are United States citizens; and (5) Ran maintains his finances exclusively in Texas.
In weighing this evidence, the Fifth Circuit relied on earlier analysis in In re SPhinX, Ltd., 351 B.R. 103 (Bankr. S.D.N.Y. 2006), affâd, 371 B.R. 10 (S.D.N.Y. 2007) â and more specifically, on analysis in In re Loy, 380 B.R. 154. 162 (Bankr. E.D. Va. 2007) (the only case to address the concept of COMI with respect to an individual debtor) â in which the Bankruptcy Court noted that factors such as (1) the location of a debtorâs primary assets; (2) the location of the majority of the debtorâs creditors; and (3) the jurisdiction whose law would apply to most disputes, may be used to determine an individual debtorâs COMI when there exists a serious dispute. The Fifth Circuit found that, unlike the Loy decision, the initial presumption (and the ultimate preponderance of evidence) under these factors weighed in Ranâs favor.
Undeterred, Lavie argued that the Fifth Circuit ought not to confine its COMI inquiry to the âsnapshotâ of Ranâs domicile that existed at the time the Chapter 15 petition was filed. Instead, he argued that the Fifth Circuit ought to look back to Ranâs âoperational historyâ in Israel for a more comprehensive determination of COMI.
The Fifth Circuit panel was not persuaded. Instead, it looked to the statuteâs use of present tense (i.e., a âmain proceedingâ is a âforeign proceeding pending in the country where the debtor has the center of its main interestsâ) to determine the COMI inquiry as dispositive of what evidence was relevant, and what evidence was not.
The panel then went on to provide policy bases for the âsnapshotâ approach to COMI, explaining that locating COMI as of the date the petition is filed aids international harmonization and promotes predictability. Perhaps most significantly the panel noted âit is important that the debtorâs COMI be ascertainable by third parties . . . . The presumption is that creditors will look to the law of the jurisdiction in which they perceive the debtor to be operating to resolve any difficulties they have with that debtor, regardless of whether such resolution is informal, administrative or judicial.â
On the question of whether Ranâs proceeding was a foreign ânon-mainâ proceeding, the Fifth Circuit panel pondered its definition, i.e., âa foreign proceeding, other than a foreign main proceeding, pending in a country where the debtor has an establishment.â Lavie argued that Ranâs involuntary proceeding in Israel was, in itself, an âestablishment.â Section 1502(2), however, defines an âestablishmentâ as âany place of operations where the debtor carries out a nontransitory economic activity.â
Unlike COMI, the existence of an âestablishmentâ is a simple factual determination with no presumptions in anyoneâs favor.Â However, one court has noted that âthe bar is rather highâ to prove the debtor maintains an âestablishmentâ in a foreign jurisdiction.
In essence, the Fifth Circuit found that in order to have an âestablishment,â Ran must have had âa place from which economic activities are exercised on the market (i.e. externally), whether the said activities are commercial, industrial or professionalâ at the time that Lavie filed the petition for recognition.
For the same reasons that gave rise to the Fifth Circuitâs weight of the evidence in Ranâs favor regarding the âmain proceeding,â the Israeli proceeding was determined not to be a ânon-mainâ proceeding â and, therefore, not entitled to any recognition within the US.
In addition to being the first appellate decision addressing an individualâs COMI, the Ran case is noteworthy for the proposition that the mere existence of an individualâs insolvency proceeding, pending in another jurisdiction, is insufficient to qualify for recognition under US law. Instead, there must be a demonstration of ongoing activity â either through a showing of COMI, or through the âestablishmentâ of ongoing activity â to qualify.
Further, though it is specifically limited to its own facts, the Ran decision offers a glimpse into the Fifth Circuitâs general approach to COMI â in particular, its observance that the debtorâs COMI should be ascertainable by third parties. This observance may prove significant in the event that similar disputes over the much larger and more contentious Stanford proceedings (see prior posts about Stanford here) ever make their way to the Circuit Court.
A brief update on Stanford (earlier posts are available here):
Evidentiary hearings scheduled for late January in the ongoing struggle for control over the financial assets of Stanford International Bank, Ltd. (SIB), the cornerstone of Allen Stanfordâs financial-empire-turned-Ponzi-scheme, were cancelled by presiding US District Court Judge David Godbey.
As readers of this blog are aware, Antiguan liquidators Peter Wastell and Nigel Hamilton-Smithâs efforts to obtain recognition in the US for their Antiguan wind-up of SIB, and US receiver Ralph Janveyâs competing efforts to do the same in Canadian and UK courts, were to culminate in a hearing set for late last month.Â But shortly after a scheduled status conference on pre-hearing matters, the evidentiary was cancelled.
Recent reporting by Reuters (available here) may provide a reason for the change: Reuters reported on February 5 that the liquidators and Mr. Janvey may, in fact, be settling. According to staff writer Anna Driver, a dispute over $370 million in assets traced to Stanford, as well as $200 million located in Switzerland and the UK, are driving the parties toward a deal.
But there may be other pressures as well. The Associated Press reported (here) that last Thursday, Judge Godbey indicated his intent to rule on a request by third-party investors to commence their own involuntary bankruptcy filing, thereby replacing Mr. Janvey as a receiver.
When a foreign business entity commences a bankruptcy proceeding, US courts’ recognition of that proceeding depends onÂ whether or not it is a “foreign main proceeding” under the meaning of US Bankruptcy Code.Â Whether or not a foreign bankruptcy is a recognized “foreign main proceeding” depends on the location of the debtor’s “center of main interests” (or “COMI”).
The concept of a debtor’s “COMI” has become a critical one – not only in the US, but in a number of foreign jurisdictions including the UK.Â Â Because the same legal concept arises in multiple jurisdictions, the manner in whichÂ the “COMI” concept is applied across international boundaries carries with it the potential for the same sort of duplication, jurisdictional confusion, and mischief that led to the development and implementation of UNCITRAL’s model cross-border insolvency law in the first place.Â Consequently, getting COMI right – and getting it consistent across jurisdictional borders – has become a matter of international concern.
The importance of COMI has come to light most recently in the Stanford matter (see prior posts here), where multiple courts have been asked to determine COMI for Stanford International Bank, Ltd. (SIB).Â In Texas, Judge David Godbey has taken extensive briefing from the parties in advance of a decision on recognition.Â In London, Mr. Justice Lewison’s original decision finding SIB’s COMI to be Antigua – rendered last July – saw approximately 5 days of appellate argument at the end of last year.Â The parties presently awaitÂ a decision from the English Court of Appeal.
The Stanford matter highlights a fundamental question about COMI:Â Should it be a flexible concept, susceptible to broad judicial discretion?Â Or should COMI be based purely on objective factors, precisely and mechanically applied?
Mr. Justice Lewison’s prior decision in London (summarized and avaialableÂ here) took an essentiallyÂ mechanistic approach to determining COMI, focusing primarily – as the UK Regulation requires – onÂ what creditors objectively perceived about the debtor.Â US law – which, like England’s, is based on the UNCITRAL model – likewise places similar emphasis on creditors’ perceptions in dealing with the debtor.
But did legislators in the UK or the US intend that theÂ analysis should stop with what creditors knew or likely would have known about the debtor?
After all, Stanford’s operation was a sham.Â And where creditors’Â perceptions of SIB were based on a sham, is it appropriate to perpetuate the sham in determining COMI?
While the English Court of Appeal deliberates Lewison J’s decision, Judge Godbey appears headed in a slightly different analytical direction.Â Specifically, the questions on which he’s requested briefing in the Texas proceeding appear to focus more specifically on the similarity of COMI to a debtor’s “principal place of business” as that concept is recognized under US law.Â Though not inconsistent with what creditors would have perceived about the debtor, it tends to focus more broadly on factors which, though objective, are not tied as closely to what the debtor held out to specific parties.Â Instead, the debtor’s “principal place of business” views the totality of the debtor’s operations – whether or not such operations were completely visible to creditors or other third parties – and, on the basis of these specific facts, determines the debtor’s principal place of business.
Whether a possible change in COMI analysis means a change in SIB’s COMI remains to be seen.
Evidentiary hearings are scheduled for later this month in the ongoing struggle for control over the financial assets of Stanford International Bank, Ltd. (SIB), the cornerstone of Allen Stanford’s financial-empire-turned-Ponzi-scheme.Â A series of posts on this blog have covered liquidators Peter Wastell and Nigel Hamilton-Smith’s efforts to obtain recognition in the US for their Antiguan wind-up of SIB, and US receiver Ralph Janvey’s competing effortsÂ to do the same in Canadian and UK courts.
The Stanford case is of considerable significance in the US – and in the UK and Canada, where it has spawned at least two decisions and related appeals over the parties’ efforts to obtain cross-border recognition for their respective efforts to clean up the Stanford mess.
In Dallas, Texas, where an enforcement action commenced by the American Securities and Exchange Commission remains pending (and where Mr. Janvey has been appointed as a receiver for the purposes of marshalling Stanford assets for distribution to creditors), US District Court Judge David Godbey has taken prior pleadings from both sides under advisement and, in advance ofÂ this month’s hearing,Â has requested further briefing on three issues.Â Mr. Janvey’s brief, submitted last week,Â addresses each of these as follows:
The Liquidators have argued that, under applicable Fifth Circuit standards, SIB’s “principal place of business” was Antigua andÂ that its activities were actively managed from Antigua, and were not “far flung” so as to render SIB’s Antiguan location irrelevant.
Predictably enough, Mr. Janvey responds that under appropriate circumstances, the Fifth Circuit applies principles of alter ego and disregards corporate formalities in determining an entity’s âprincipal place of business:âÂ “The Fifth Circuit applies alter ego doctrines not only to enforce liability against shareholders and parent companies, but also to determine a corporationâs ‘principal place of business’ for jurisdictional purposes.” (citing Freeman v. Nw. Acceptance Corp., 754 F.2d 553, 558 (5th Cir. 1985)).
Based on this construction of Fifth Circuit law – and because COMI is generally equated to an entity’s “principal place of business” under US corporate law – Â Â Janvey then argues that consistency and logic require the same rules be followed for COMI purposes.Â He then goes on to argue that Stanford’s Ponzi scheme activities were âfar flung,â that SIBâs Antiguan operations were âpassive,â and that its ânerve centerâ and âplace of activityâ were both in the U.S.
Wastell and Hamilton-Smith have argued that financial advisors who sold SIB’s CDs to potential investors were, in fact, independent agents employed by other, independentÂ Stanford broker-dealer entities and were not controlled by SIB.
Mr. Janvey pours scorn on this argument.Â According to him, it does not matter that there were inter-company âcontractsâ purporting to make the Stanford broker-dealer entities agents for SIB in the sale of CDs.Â As Mr. Janvey views it, a fraud is a fraud . . .Â from beginning to end.Â Consequently, there was no substance to the “contracts” as all the entities involved were instruments of Stanfordâs fraud.
As noted above, Mr. Janvey takes the position that “alter ego” treatment of the Stanford entities is not only viable – it is the only appropriate means of treating SIB’s relationship to other, US-based Stanford entities, and of determining COMI for SIB.Â He argues further that substantive consolidation – the bankruptcy remedy referred to by Messr’s. Wastell and Hamilton-Smith – can be just as effectively accomplished through a federal receivership, which affords US District Courts significant latitude in fashioning equitable remedies and determining distributions to various classes of creditors.
Mr. Janvey’s argument appears quite straightforward.Â Because a fraud is a fraud, geography matters very little in determining its “center of main interests.”Â According to him, what should count instead is the location of the fraudsters and the place from which the fraud was managed and directed.Â Yet even Mr. Janvey acknowledges that “Antigua played a role in [Stanford’s Ponzi] scheme . . . [in that] [Antigua] was where Stanford could buy off key officials in order to conduct his sham business without regulatory interference.”Â In other words, geography was important . . . at least for Stanford.Â Specifically, geography provided Stanford direct access to a corrupt regulator who would afford cover for the conduct of Stanford’s fraudulent CD sales to investors.
Mr. Janvey addresses this potential problem by taking aim at the entire Antiguan regulatory structure:
Mr. Janvey then goes further still, arguing that Messr’s. Wastell and Hamilton-Smith (and their employer, British-based Vantis plc) are precluded by Antiguan law from complying with the disclosure requirements Judge Godbey has imposed on the US receivership – and therefore simply unable to concurrently administer a “main case” in Antigua and cooperate with the Receiver (or with the District Court) in the US.
Finally, Mr. Janvey gets directly personal: He recites the opinion of the Canadian court that revoked Vantis’ administration of Stanford’s Canadian operations and refused recognition of the Antiguan wind-up on the grounds that “Vantis’ conduct, through [Messr’s. Wastell and Hamiton-Smith], disqualifies it from acting and precludes it from presenting the motion [for Canadian recognition], as [Vantis] cannot be trusted by the [Canadian] Court . . . .”Â The Canadian court’s opinion has been upheld on appeal, and is now final.
In a nutshell, Mr. Janvey argues that geography shouldn’t matter where a fraud is concernedÂ . . . but if it does matter, it ought to count against jurisdictions such as Antigua, an “impoverishedÂ island” which has a population “about 80% that of Waco, Texas” and a history of financial fraud.
As is sometimes said in Texas, “Them’s fightin’ words.”
The SEC’s brief, like Mr. Janvey’s,Â is also on file.Â Messr’s. Wastell and Hamilton-Smith’s reply will be due shortly.
An update regarding PeterÂ Wastell and Nigel Hamilton-Smith’sÂ dispute withÂ federal Receiver Ralph Janvey overÂ control of Stanford International Bank Ltd. (SIB)’s financial assets, andÂ the 13th in a series on this blog covering the dissolution of Allen Stanford’s erstwhile financial empire and alleged international “Ponzi scheme” – a dissolution playing out in Montreal, London, and Dallas.
Wastell and Hamilton-Smith, liquidators appointed by Antiguan regulators for the purpose of winding up SIB in Antigua, and Janvey – a federal Receiver appointed at the behest of the US Securities and Exchange Commission to oversee the dissolution of Stanford’s financial interests in connection with an enforcement proceeding in the US – haveÂ sought recognition of their respective efforts in courts outside their home jurisdictions.Â Each has met with mixed results: Janvey’s request for recognition was denied in the UK, while Wastell and Hamilton-Smith, originally recognized in Canada, have been removed and replaced by a Canadian firm.Â Each of these results has been appealed.
Meanwhile, Wastell and Hamilton-Smith have sought recognition of the Antiguan wind-up in Janvey’s home court pursuant to Chapter 15 of the US Bankruptcy Code.Â Initial briefing was submitted several months ago; supplemental filings (including copies of the decisions rendered in London and Montreal) have been trickling in.Â US District Court Judge David Godbey has set an evidentiary hearing for mid-January 2010.
Messr’s. Wastell and Hamilton-Smith’s supplementalÂ brief, filed last week in Dallas,Â addresses three issues, apparently raised by Judge Godbey during a recent conference call with the parties:
The liquidators acknowledge that while Chapter 15 of the US Bankruptcy Code doesn’t refer to an entity’s “principal place of business” in dealing with a cross-border insolvency,Â many US courts nevertheless analogize an entity’s “principal place of business” to its “center of main interests” (COMI) for purposes of determining the forum that should host the “main case.”Â Â The American approach is, according to the liquidators, similar to that followed by European courts.
That said,Â what constitutes an entity’sÂ “principal place of business” is not a settledÂ question under US federal case law: The Fifth Circuit (where the Stanford matters are pending) applies a “total activity” test, which is also applied by the Sixth, Eighth, Tenth and Eleventh Circuits, whereas the Ninth Circuit applies a “place of operations” test, the Seventh Circuit applies a “nerve center” test, and the Third Circuit examines the corporation’s center of activity.Â The liquidators suggest in a footnote that these “varying verbal formulas” are functional equivalents, and “generally amount to about the same thing” under nearly any given set of facts.
A significant portion of the liquidators’ brief is devoted to applying the facts of SIB’s dissolution to the Fifth Circuit’s “verbal formula;” i.e., “(1) when considering a corporation whose operations are far-flung, the sole nerve center of that corporation is more significant in determining principal place of business, (2) when a corporation has its sole operation in one state and executive offices in another, the place of activity is regarded as more significant, but (3) when the activity of a corporation is passive and the âbrain’ of that corporation is in another state, the situs of the corporation’s brain is given greater significance.”Â See J.A. Olson Co. v. City of Winona, 818 F.2d 401, 411 (5th Cir. 1987).
The liquidators argue:
– SIB’s principal place of business was in Antigua;
– SIB’s activities were neither “passive” nor “far flung” and thus the “nerve center” test should not predominate; but
– even if SIB’s operations were passive or far flung (which they were not), its “nerve center” was in Antigua.
The liquidators are emphatic that financial advisors who marketed and sold SIB’s CD’s to potential investors were not, in fact, agents of SIB.Â Rather, “they operated individually under management agreements with SIB, or were employed by other Stanford companies which had management agreements with SIB . . . .Â These advisors worked for Stanford related entities all over the world, including Antigua, Aruba, Canada, Colombia, Ecuador, Mexico, Panama, Peru, Switzerland, and Venezuela, as well as in the United States . . . . All of the financial advisors marketed the CDs but none had authority to contract on behalf of SIB . . . . Further, Liquidators understand that the financial advisors sold other Stanford-related products besides SIB CDs.”Â Those advisors who were located in the US ‘worked for an entity called the Stanford Group Companies (“SGC”), and though they marketed SIB CDs to potential depositors, they were not agents of SIB.'”
Put succinctly, the liquidators’ argument is that an international network of independent sales agents does not create the sort of “agency” that would alter cross-border COMI analysis under US law: “[US] Courts analyzing similar circumstances have consistently held that a company’s COMI or its principal place of business is in the jurisdiction where its operations are conducted even if the company has sales representatives in other jurisdictions.”
Â Finally, the liquidators argue that SIB is neither part of a “single business enterprise” nor an “alter ego” of other Stanford entities or of Stanford’s senior managersÂ – and their respective “principal place[s] of business” in the US cannot be imputed to SIB for purposes of determining SIB’s COMI.Â This is so, according to Messr’s. Wastell and Hamilton-Smith, because:
– The doctrine of “single business enterprise” liability is a particular creature of Texas law – which, in addition to being inapplicable to an Antiguan-chartered international bank such as SIB, is itself no longer viable even in Texas.Â See SSP Partners v. Gladstrong Invs. (USA) Corp., 275 S.W.3d 444, 456(Tex. 2008) (rejecting the theory because Texas law does not “support the imposition of one corporation’s obligations on another” as permitted by the theory); see also Acceptance Indemn. Ins. Co. v. Maltez, No. 08-20288, 2009 WL 2748201, at *5 (5th Cir. June 30, 2009) (unpublished) (recognizing the holding of Gladstrong).
– The doctrine of “alter ego” does not apply because its primary use is to permit corporate creditors to “pierce the corporate veil” and seek recourse from the corporation’s parent or individual shareholders.Â Here, the liquidators argue, Mr. Janvey is attempting to pierce the corporate veil in the opposite direction:Â He is attempting to permit creditors of a corporate parent or individual principals to seek recourse from a distinct and separate foreign subsidiary.Â Such “reverse veil piercing” is properly obtained (if at all) through the “extreme and unsual” remedy of substantive consolidation through bankruptcy.Â However, liquidation of the Stanford entities through a federal bankruptcy proceeding is something Mr. Janvey has, to date,Â “studiously avoided.”
– The equitable purposes of the “alter ego” doctrine would be frustrated in this case.Â The “injustice” that “alter ego” relief is designed to reverse would, in fact,Â only be furthered where SIB investors would see their recoveries diluted by creditors of other Stanford entities.
Mr. Janvey’s response is due December 17.
A brief but important update regarding Antiguan liquidators Peter Wastell and Nigel Hamitlon-Smith’s pending request for US recognition of their wind-up of Stanford International Bank, Ltd. (SIB):
US District Court Judge David Godbey has set an evidentiary hearing to determine whether SIB’s center of main interest (COMI) is Antigua – or whether, as urged by US receiver Ralph Janvey, Dallas-based enforcement proceedings commenced by the US Securities and Exchange Commission (SEC) and involving numerous Stanford entities (including SIB) should serve as SIB’s “main case.”
As readers of this blog are aware, Wastell and Hamitlon-Smith’s request to modify an injunction in the SEC enforcement matter and seek US recognition of their Antiguan wind-up proceeding was previously granted over Mr. Janvey’s objection.Â Recognition of the Antiguan wind-up already has been granted in the UK through London’s High Court of Justice (Chancery Division) – and already has been the source of some scholarly commentary in that jurisdiction.Â Prior posts on the UK ruling – as well as on other aspects of the Stanford case – are available here.
Judge Godbey’s evidentiary hearing is scheduled for January 21, 2010.Â The parties’ proposed briefing schedule is available here.
As readers of this blog are aware, Antiguan liquidators Peter Wastell and Nigel Hamilton-Smith and federal receiver Ralph Janvey have been busy in several forums battling for control of the financial assets previously controlled by Allen Stanford, including Stanford International Bank, Ltd. (SIB).Â Prior posts are accessible here.
Messr’s. Wastell and Hamilton-Smith have filed numerous pleadings from other courts in support of their pending request, before US District Court Judge David Godbey, for recognition of their liquidation of SIB as a “main case” under Chapter 15 of the US Bankruptcy Code.
Mr. Janvey has recently filed his own copies of several recent rulings.Â These include a ruling in which the Quebec Superior Court’sÂ Mr. Justice Claude Auclair found that Vantis Business Recovery Services – a division of British accounting, tax, and advisory firm Vantis plc, and the firm through which Messr’s. Wastell and Nigel Hamilton-Smith were appointed liquidators for SIB – should be removed from receivership of SIB’s Canadian operations.
More recently, Mr. Janvey has filed a copy of a recently unsealed plea agreement between Stanford affiliate James Davis and federal prosecutors.
Mr. Janvey’s papers provide a glimpse into Davis’ relationship with Stanford, and into the origins of SIB.Â Summarized briefly:
– Davis’ and Stanford’s relationship dates back to the late 1980s, when Stanford retained Davis to act as the controller for then-Montserrat-based Guardian International Bank, Ltd.Â Davis’ plea agreement recites that Stanford had Davis falsify the bank’s revenues and portfolio balances for banking regulators.Â Continued regulatory scrutiny in Montserrat eventually led to Stanford’s closure of Guardian and removal of its banking operations to Antigua – where, in 1990, it resumed operations under the name of Stanford International Bank, Ltd.
– SIB and a “web of other affiliated financial services companies” operated under the corporate umbrella of Stanford Financial Group.Â SIB’s primary function was to market supposedly safe and liquid “certificates of deposit” (CDs).Â By 2008, SIB had sold nearly $7 billion of them to investors worldwide.
– Davis’ plea agreement further recites that investors were assured SIB’s operations were subject to scrutiny by the Antiguan Financial Services Regulatory Commission (FSRC), and to independent, outside audits.
SIB’s Asset Allocation and Operations
– In fact, SIB investor funds were neither safe nor secure.Â According to Davis’ plea agreement, investor funds did not go into the marketed CDs.Â Instead, they were placed into three general “tiers”: (i) cash and cash equivalents (“Tier I”); (ii) investments managed by outside advisors (“Tier II”); and (iii) “other” investments (“Tier III”).Â By 2008, the majority of SIB’s investor funds – approximately 80% – wereÂ held in “highly illiquid real and personal property” in “Tier III,”Â including $2 billion in “undisclosed, unsecured personal loans” to Allen Stanford.Â A further 10% was held in “Tier II.”Â Â The remaining 10% balance was presumably held in “Tier I.”
– Likewise, SIB’s operations were not subject to any meaningful scrutiny.Â Davis’ plea agreement recites that in or about 2002, Stanford introduced him to Leroy King, a former Bank of America executive and Antiguan ambassador to the US, and soon-to-be Chief Executive Officer of the FSRC.Â Stanford, King, and another FSRC employee responsible for regulatory oversight performed a “blood oath” brotherhood ceremony sometime in 2003 – ostensibly to cement their commitment to one another and King’s commitment to the protection of SIB – i.e., to “ensure that Antiguan bank regulators would not ‘kill [SIB’s] business'” in Antigua.
– Though blood may be thicker than water, it is not thicker than cash: Stanford’s and King’s “brotherhood” was cemented further by bribes paid to King for his protection of SIB.Â Acccording to Davis’ plea agreement, these bribes ultimately exceeded $200,000.Â In return for this largesse, King reassigned two overly inqusitive Antiguan examiners of which Stanford complained sometime in 2003.Â In 2005 and again in 2006, King further cooperated with Stanford in providing misleading responses to the US Securities and Exchange Commission (SEC)’s inquiries to the FSRC, in which the SEC divulged to the FSRC that it had evidence of SIB’s involvement in aÂ “possible Ponzi scheme.”Â King and Stanford similarly collaborated in responding to a 2006 inquiry by the Director of the Eastern Caribbean Central Bank’s Bank Supervision Department regarding SIB’s affiliate relationship with the Bank of Antigua.
SIB’s Financial Reporting
– A central premise of Stanford’s approach to soliciting investments – and, perhaps understandably, a central point of interest for would-be investorsÂ – was that SIB must show a profit each year.Â To accomplish this, Davis and Stanford reportedly initially determined false revenue numbers for SIB.Â Ultimately, this collaboration gave rise to a fabricated annual “budget” for SIB, which would show financial growth.Â Using these “budgeted” growth numbers, Stanford accounting employees working in St. Croix would generate artificial revenues (and resulting artificial ROIs), which were then transmitted to Stanford’s Chief Accounting Officer in Houston and ultimately to Davis in Mississippi for final adjustment and approval before making their way back to the Caribbean for reporting to SIB investors.
– According to Davis’ plea agreement, “[t]his continued routine false reporting . . . created an ever-widening hole between reported assets and actual liabilities, causing the creation of a massive Ponzi scheme . . . .Â By the end of 2008, [SIB reported] that it held over $7 billion in assets, when in truth . . . [SIB] actually held less than $2 billion in assets.”
– In about mid-2008, Stanford, Davis, and others attempted to plug this “hole” created by converting a $65 million real estate transaction in Antigua into a $3.2 billion asset of SIB through a “series of related party property flips through business entities controlled by Stanford.”
SEC Subpoenas and SIB’s Insolvency
– By early 2009, the SEC had issued subpoenas related to SIB’s investment portfolio.Â At a February meeting held in advance of SEC testimony, Stanford management determined that SIB’s “Tier II” assets were then valued at approximately $350 million – down from $850 million in mid-2008.Â Management further determined thatÂ andÂ SIB’s “Tier III” assets consisted of (i) real estate acquired for less than $90 million earlier in the year, but now valued at more than $3 billion; (ii) $1.6 billion in “loans” to Stanford; and (iii) other private equity investments.Â Davis’ plea agreement recites that at that same meeting, and despite the apparent disparity between actual and reported asset values, Stanford insisted that SIB had “‘at least $850 million more in assets than liabilities.'”Â In a separate meeting later that day, however, Stanford reportedly acknowledged that SIB’s “assets and financial health had been misrepresented to investors, and were overstated in [SIB’s] financials.”
Janvey doesn’t describe exactly how these acknowledged facts integrate into his prior opposition to the Antiguan liquidators’ request for recognition.Â His prior pleadings have questioned indirectly the integrity of the Antiguan wind-up proceedings; consequently, Mr. King’s role in protecting SIB under the auspices of the Antiguan FSRC may well be the point.Â Likewise, Janvey may point to the US-based control and direction of financial reporting manipulations that ultimately created a $5 billion “hole” in SIB’s asset structure as evidence of the American origin of SIB’s allegedly fraudulent operations.Â Or the filing may be intended to blunt the effect of a previously filed detention order – issued by another US District Court and affirmed by the US Fifth Circuit Court of Appeals – confining Stanford to the US and observing that his ties to Texas were “tenuous at best.”
It remains for Judge Godbey to determine whether – and in what way and to what degree – Davis’ plea agreement impacts on the liquidators’ request for a determination that SIB’s “center of main interests” remains in Antigua.
For the moment, the parties await his decision.
Postings on this blog have focused on the cross-border battle betweenÂ Antiguan liquidators Peter Wastell and Nigel Hamilton-Smith and federal receiver Ralph Janvey for control of the financial assets previously controlled by Sir Allen Stanford, including Stanford International Bank, Ltd.Â (SIB).Â A complete digest of prior posts is available here.
Mr. Janvey, meanwhile,Â has had to address yet another challenge to his receivership –Â from investors seeking to commence an involuntary Chapter 7 case.Â In early September, an ad hoc group of CD and deposit-holders fronted by Dr. Samuel Bukrinsky, Jaime Alexis Arroyo Bornstein, and Mario Gebel requested an expedited hearing on their request for leave to commence an involuntary bankruptcy against the Stanford entities.
The ad hoc investor group’s September request was not their first: In May of this year, the same investors requested essentially the same relief.Â That request was never acted on, presumably because presiding US District Court Judge David Godbey already had imposed a 6-month moratorium on interference with the receivership.
With the moratorium’s expiration, the investorsÂ have raised the issue once again.
A Receivership Run Wild?
TheirÂ second request largely repeats the investors’Â prior arguments, many of them rather personal: No one is happy with the way this receivership has been run, they claim.Â Specifically, the receivership is far too expensive and the lack of meaningful participation deprives creditors of significant due process rights.Â Instead, an involuntary liquidation under Chapter 7 of the US Bankruptcy Code is the best and most efficient means of reining in expenses and preserving those rights.Â The investors’ briefÂ offers a picture of the 21st century Stanford receivership more closely resembling Dickens’Â 19th century “Bleak House”: Professional fees accruing at an “alarming” rate (in this case, an estimated $1.1M per week);Â an estate at risk of being consumed entirely by administrative costs; and investors ultimately twice victimized.
The investors further argue that an injunction prohibiting creditors’ access to the US bankruptcy system is, at best, an interim measure.Â As such, it can never be employedÂ on a permanent basisÂ – and, therefore, cannot survive the standards for injunctive relief articulated under the Federal Rules of Civil Procedure.Â They cite a variety of decisions which stand – according to them – for the proposition that the US Bankruptcy Court offers the best forum for complex liquidations such as the one at hand.
Creditors Who Don’t Know What’s Best For Them?
Predictably, Mr. Janvey disagrees in the strongest terms.
As he sees it (and as he sees a string of federal cases referenced in his response), a federal equity receivership – and not a federal bankruptcy proceeding – is the accepted, “decades-long practice” of federal courts in winding up entities that were the subject of alleged Ponzi schemes and other frauds.Â Moreover, Mr. Janvey suggests that if creditors are dissatisfied with the expense and claimed inefficiency of this proceeding, transition to a liquidation under the US Bankruptcy Code would be even more so.Â In support, Mr. Janvey offers a “parade of horribles,” such as the “procedural nightmare” involved in transitioning much of the complex litigation already underway in the receivership to a bankruptcy trustee’s administration, the likely existence of multiple creditors’ committees (and the attendant expense of their counsel), and the need to sort outÂ the Antiguans liquidators’Â competing Chapter 15 recognition request even if a Chapter 7 petition is filed.
Perhaps most significantly, however, Mr. Janvey believes that flexibility regarding a plan of distribution should govern the administration of the Stanford matters:
Mr. Janvey does not develop how a receiver’s application of equitable principlesÂ might differ from the equitable and other subordination provisions of Bankruptcy Code section 510.Â Ultimately, his response reduces itself to a simple proposition for Judge Godbey and for creditors:
Unfortunately, Messr’s. Bukrinsky,Â Bornstein, andÂ Gebel do not.Â Their reply briefÂ – submitted last Friday – again reiterates that the Stanford receivership has outlived its usefulness inÂ this highly complex insolvency.Â According to them, the Stanford record speaks for itself.Â It is time forÂ a new regime.
Like the liquidators’ request for US recognition of their Antiguan-based wind-up of SIB, the parties now await Judge Godbey’s decision.
A brief update in the ongoing struggle between Antiguan liquidators Peter Wastell and Nigel Hamilton-Smith and federal receiver Ralph Janvey over control of the financial assets previously controlled by Sir Allen Stanford, including Stanford International Bank, Ltd. (SIB):
Readers of this blog will be aware that several recent court rulings – including a detention order for Sir Allen issued by the US District Court and recognition orders issued in England and Canada – have threatened to undermine Mr. Janvey’s position in a Dallas receivership before US District Judge David Godbey, where Stanford’s financial assets are under court control.Â For details on each of these orders and on other aspects of the Stanford matters, see prior posts locatedÂ here, here, here, here, here, here, here, and here.
Recently, however, Mr. Janvey may have gotten a little help . . . from North of the border.
In related rulings issued Friday, September 11, Mr. Justice Claude Auclair of the Quebec Superior Court found that Vantis Business Recovery Services – a division of British accounting, tax, and advisory firm Vantis plc, and the firm through which Messr’s. Wastell and Nigel Hamilton-Smith were appointed liquidators for SIB – should be removed from receivership of SIB’s Canadian operations.
According to a report by Toronto’s GlobeÂ and Mail, Mr. Justice Auclair found that Wastell and Hamilton-Smith’s firm acted improperly in destroying original computer evidence from SIB’s Montreal branch office and “stonewalled efforts by Quebec’s financial authority – the AutoritĂ© des marchĂ©s financiers [the Financial Market Authority] – to get access to the copied information.”
In verbal rulings that will cost the liquidators control of the Canadian receiverhsip (which will now go to Ernst & Young Canada), Mr. Justice Auclair reportedly “derided” Vantis’ “high-handed” behavior after an Antiguan court made appointments to wind down SIB – and its Montreal office – and recover funds for alleged Canadian victims.
Reacting to arguments that Antiguan banking privacy laws prevented direct disclosure of information to the Canadian authorities and that destruction of SIB’s Montreal computer databases was necessary to keep them out of the hands of creditors seeking to repossess SIB’s Montreal office, Mr. Justice Auclair is said to have retorted, “As if we don’t have any safes in Canada to protect and preserve” such materials.
As if, indeed.
In pleadings filed with the US District Court, Mr. Janvey previously complainedÂ thatÂ the liquidators “erased all SIB electronic data from SIB servers in Montreal, removed data to Antigua, and attempted to seize over US$21 million in SIB funds through an ex parte legal proceeding in which they failed to disclose to the Canadian court the existence of [the receivereship] and the appointment of the US Receiver”Â Messr’s. Wastell and Hamilton-Smith have, of course, indignantly disclaimed Mr. Janvey’s “scurrilous and specious accusations of misconduct” regarding their administration of Canadian assets.
Whether or not it is “scurrilous” or “specious,” the liquidators’ conduct has apparently created controversy with more than Mr. Janvey alone,Â if the Globe and Mail‘s account is accurate.
Meanwhile, the parties await Judge Godbey’s ruling in Dallas.