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    Posts Tagged ‘David Godbey’

    The Stanford Saga – Chapter 16: Settlin’ Words? Or Something Else?

    Monday, February 15th, 2010

    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 Stanford’s 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-Smith’s efforts to obtain recognition in the US for their Antiguan wind-up of SIB, and US receiver Ralph Janvey’s competing efforts to do the same in Canadian and UK courts, were to culminate in a hearing set for late last month.  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.

    Stay tuned.

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    The Stanford Saga – Chapter 14: Fightin’ Words.

    Monday, January 4th, 2010

    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.  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 efforts 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 of this month’s hearing, has requested further briefing on three issues.  Mr. Janvey’s brief, submitted last week, addresses each of these as follows:

    The Current State of Fifth Circuit Law on What Constitutes an Entity’s “Principal Place of Business,” Including Whether Stanford International Bank’s (“SIB”) Activities Were Active, Passive or “Far Flung.”

    The Liquidators have argued that, under applicable Fifth Circuit standards, SIB’s “principal place of business” was Antigua and 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 “principal place of business:”  “The Fifth Circuit applies alter ego doctrines not only to enforce liability against shareholders and parent companies, but also to determine a corporation’s ‘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 –   Janvey then argues that consistency and logic require the same rules be followed for COMI purposes.  He then goes on to argue that Stanford’s Ponzi scheme activities were “far flung,” that SIB’s Antiguan operations were “passive,” and that its “nerve center” and “place of activity” were both in the U.S.

    The Relationship Between SIB and the Financial Advisors Who Marketed SIB’s CDs to Potential Investors.

    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, independent Stanford broker-dealer entities and were not controlled by SIB.

    Mr. Janvey pours scorn on this argument.  According to him, it does not matter that there were inter-company “contracts” purporting to make the Stanford broker-dealer entities agents for SIB in the sale of CDs.  As Mr. Janvey views it, a fraud is a fraud . . . from beginning to end.  Consequently, there was no substance to the “contracts” as all the entities involved were instruments of Stanford’s fraud.

    The “Single Business Enterprise” Concept as Part of the “Alter Ego” Theory of Imposing Liability.

    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.  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.  Because a fraud is a fraud, geography matters very little in determining its “center of main interests.”  According to him, what should count instead is the location of the fraudsters and the place from which the fraud was managed and directed.  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.”  In other words, geography was important . . . at least for Stanford.  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:

    “Chapter 15 contains a public policy exception: ‘Nothing in the chapter prevents the court from refusing to take an action governed by this chapter if the action would be manifestly contrary to the public policy of the United States.’ 11 U.S.C. § 1506. The facts warrant application of the public policy exception here. The very agency that first appointed the Antiguan [l]iquidators and then obtained their confirmation from the Antiguan court was complicit in Stanford’s fraud. That same agency has allowed financial fraud to flourish on Antigua for decades. It would be contrary to public policy for this Court to cede to Antigua the winding up of a company that bilked Americans and others out of billions when it was Antigua that permitted the fraud.”

    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 . . . .”  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 concerned . . . but if it does matter, it ought to count against jurisdictions such as Antigua, an “impoverished 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, is also on file.  Messr’s. Wastell and Hamilton-Smith’s reply will be due shortly.

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    The Stanford Saga – Chapter 12: Showtime.

    Monday, November 23rd, 2009

    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.  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.  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.  The parties’ proposed briefing schedule is available here.

    Stay tuned.

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    The Stanford Saga – Chapter 11: Is Something Rotten in the State of Antigua?

    Monday, November 16th, 2009

    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).  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.  These include a ruling in which the Quebec Superior Court’s 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.  Summarized briefly:

    SIB’s Background

    – 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.  Davis’ plea agreement recites that Stanford had Davis falsify the bank’s revenues and portfolio balances for banking regulators.  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.  SIB’s primary function was to market supposedly safe and liquid “certificates of deposit” (CDs).  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.  According to Davis’ plea agreement, investor funds did not go into the marketed CDs.  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”).  By 2008, the majority of SIB’s investor funds – approximately 80% – were held in “highly illiquid real and personal property” in “Tier III,” including $2 billion in “undisclosed, unsecured personal loans” to Allen Stanford.  A further 10% was held in “Tier II.”  The remaining 10% balance was presumably held in “Tier I.”

    – Likewise, SIB’s operations were not subject to any meaningful scrutiny.  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.  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.  Acccording to Davis’ plea agreement, these bribes ultimately exceeded $200,000.  In return for this largesse, King reassigned two overly inqusitive Antiguan examiners of which Stanford complained sometime in 2003.  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 a “possible Ponzi scheme.”  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 investors – was that SIB must show a profit each year.  To accomplish this, Davis and Stanford reportedly initially determined false revenue numbers for SIB.  Ultimately, this collaboration gave rise to a fabricated annual “budget” for SIB, which would show financial growth.  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 . . . .  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.  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.  Management further determined that  and 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.  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.'”  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.  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.  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.  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.

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    The Stanford Saga – Chapter 10: “Bleak House” Redux?

    Monday, October 19th, 2009

    Postings on this blog have focused on the cross-border battle between 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. (SIB).  A complete digest of prior posts is available here.

    Mr. Janvey, meanwhile, has had to address yet another challenge to his receivership – from investors seeking to commence an involuntary Chapter 7 case.  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.  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 investors have raised the issue once again.

    A Receivership Run Wild?

    Their second request largely repeats the investors’ prior arguments, many of them rather personal: No one is happy with the way this receivership has been run, they claim.  Specifically, the receivership is far too expensive and the lack of meaningful participation deprives creditors of significant due process rights.  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.  The investors’ brief offers a picture of the 21st century Stanford receivership more closely resembling Dickens’ 19th century “Bleak House”: Professional fees accruing at an “alarming” rate (in this case, an estimated $1.1M per week); 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.  As such, it can never be employed on a permanent basis – and, therefore, cannot survive the standards for injunctive relief articulated under the Federal Rules of Civil Procedure.  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.  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.  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 out the Antiguans liquidators’ 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:

    Like the Bankruptcy Code, equity receiverships ensure that persons similarly situated receive similar treatment. In a case such as this involving massive deception, however, a searching evaluation of the facts is required to discern relevant differences between and among categories of creditors. Unlike a trustee in bankruptcy, the Receiver can take into account relative fault within a class of creditors, and fashion an equitable plan of distribution that does not treat all creditors within a class identically if they are not deserving of equal treatment.

    Mr. Janvey does not develop how a receiver’s application of equitable principles might differ from the equitable and other subordination provisions of Bankruptcy Code section 510.  Ultimately, his response reduces itself to a simple proposition for Judge Godbey and for creditors:

    “Trust me.”

    Unfortunately, Messr’s. Bukrinsky, Bornstein, and Gebel do not.  Their reply brief – submitted last Friday – again reiterates that the Stanford receivership has outlived its usefulness in this highly complex insolvency.  According to them, the Stanford record speaks for itself.  It is time for 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.

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    The Stanford Saga – Chapter 9: “As If We Don’t Have Safes In Canada!”

    Monday, September 21st, 2009

    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.  For details on each of these orders and on other aspects of the Stanford matters, see prior posts located 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 Globe 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 Autorité des marchés 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 complained that 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”  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, if the Globe and Mail‘s account is accurate.

    Meanwhile, the parties await Judge Godbey’s ruling in Dallas.

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    The Stanford Saga – Chapter 6: Mr. Justice Lewison Steals the Show

    Sunday, July 12th, 2009

    A flurry of pleadings this week precede Judge David Godbey’s anticipated ruling on Peter Wastell’s and Nigel Hamilton-Smith’s request for recognition of their liquidation of Stanford International Bank, Ltd. (SIB), now pending in Antigua.

    As readers of this blog are aware, Messr’s. Wastell and Hamilton-Smith have been at odds with Ralph Janvey, a federal receiver appointed in U.S. District Court for the purpose of administering not only SIB, but all of the assets previously controlled by Sir Allen Stanford.  Those assets and their creditors span at least three continents – North America, South America, and Europe – and have spawned insolvency proceedings in several countries.

    The Antiguan liquidators previously obtained permission from Judge Godbey – over Mr. Janvey’s opposition – to commence a Chapter 15 case in Dallas.  The liquidators then sought recognition for their Antiguan liquidiation pursuant to the provisions of Chapter 15 – which Mr. Janvey has again opposed.  A recent post on this blog summarized the Antiguan liquidators’ reply to these objections.

    This week, as scheduled, John Little – an examiner appointed by Judge Godbey to assist the Court in overseeing the receivership – filed papers summarizing his position on the liquidators’ request.

    Before he did so, however, yet another court – this one in England – weighed in on the Stanford matters.  In a decision rendered on the eve of America’s July 4 holiday, the English Hight Court of Justice, Chancery Division (London)’s Justice Lewison found that Antigua – and not the US – should be SIB’s “Center of Main Interests” (COMI) under the UK’s 2006 Cross-Border Insolvency Regulations (the general equivalent of the US’s Chapter 15).

    The crux of Mr. Justice Lewison’s 29-page decision, at least as it regards SIB’s COMI, rests both on the burden of proof to demonstrate COMI and on the nature of the evidence required to carry that burden.

    The English decision holds, first, that once certain prima facie evidence is introduced to establish COMI in a particular jurisdiction, the presumption of COMI in that jurisdiction arises in favor of the foreign representative and it is the burden of a contesting party to defeat the presumption.  Second, the decision holds that the only evidence that counts in rebutting the decision is that which would be objectively ascertainable to third parties – specifically, creditors.

    Mr. Justice Lewison’s analytical framework leads to an emphasis on the outward, physical aspects of SIB’s business operations, which the parties generally agree were centered in Antigua.

    Mr. Little, the examiner whose 19-page brief was filed last Wednesday, respectfully disagrees with Mr. Justice Lewison.  The essence of Mr. Little’s analysis is that it is the location of the management of an enterprise that determines its COMI.  According to Mr. Little:

    Banks are not just groups of tellers and form checkers, but institutions that gather money, pool it and invest it in the hopes of keeping the funds secure and making a profit.  Banks are more than the street corner branch offices or drive-through windows at which people make deposits, cash checks, pay bills and verify balances.  The weightiest activities of a “bank” are the activities involved in what a bank does with the money it gathers and manages.  To determine the locale of SIB’s COMI, the Court must determine where that activity was primarily carried out.  (Emphasis supplied).

    Mr. Little also argues that the English Court’s decision ought not to guide Judge Godbey’s determination of COMI.

    In particular, he argues that Mr. Justice Lewison’s assignment of the burden of proof regarding COMI – to the Receiver who, under English law, must overcome a presumption of COMI in the foreign representative’s favor – is at odds with American case law.  American law, explains Mr. Little, renders the COMI presumption of little weight and further assigns the burden of proof to the foreign representative seeking recogntion of a “main case” – and not to the foreign representative’s opponent.  Mr. Little argues that the “objective” evidence “ascertainable by a third party” is far different than that which an American court would consider, as borne out by relevant US decisions.  He suggests that a ruling made on such factors may, in fact, provide a “roadmap” of sorts to parties who plan to defraud the public by permitting them to construct an “objectively ascertainable” – but sham – business in a jurisdiction of their choosing.

    Finally, Mr. Little acknowledges that the “public policy exception” to Chapter 15 – set forth at Section 1506 of the Code – is a very narrow one, but offers the observation that to the extent it may apply in this case, the SEC’s position in the matter should be construed as US policy.

    On Friday, Mr. Janvey requested leave to file a supplemental brief addressing various aspects of Mr. Justice Lewison’s decision.

    Though Judge Godbey has yet to provide leave to file them, Mr. Janvey’s papers echo much of the same observations made by Mr. Little.  They also add some of Mr. Janvey’s own, additional arguments – one of which is that Mr. Justice Lewison’s reliance on an “objectively ascertainable” standard is a unique creature of the EU Insolvency Regulation, and finds no basis either in the UK Regulations (which should have controlled Mr. Justice Lewison’s decision) or in US law.  In particular, Mr. Janvey argues that the Eurofoods decision – a seminal decision on COMI rendered by the European Court of Justice, and which formed the primary basis for Mr. Justice Lewison’s decision – imposes an unnecessary restriction on the evidence which ought to be reviewed by an American court (or, for that matter, by an English court) for this purpose.

    In fact, Section 1508 itself provides that in interpreting phrases such as “center of main interests,” “the court shall consider” how those phrases have been construed in other jurisdictions which have adopted similar statutes.  As a result, considerable ink already has been spilled in the US over the EU Regulation, Eurofoods, and foreign decisions generally and their interpretive effect on determing COMI in a US Chapter 15 case.   In a recent and extensive discussion of the interpretatation of “COMI” as it appears in Chapter 15, Judge Bruce Markell discusses both the EU Regulation and Eurofoods, and observes that

    a commonality of [US] cases analyzing debtors’ COMI demonstrates that courts do not apply any rigid formula or consistently find one factor dispositive; instead, courts analyze a variety of factors to discern, objectively, where a particular debtor has its principal place of business. This inquiry examines the debtor’s administration, management, and operations along with whether reasonable and ordinary third parties can discern or perceive where the debtor is conducting these various functions.

    See In re Betcorp, 400 B.R. 266, 290 (Bankr. D. Nev. 2009) (emphasis supplied).

    Perhaps unfortunately for Mr. Janvey, Nevada’s Judge Markell sounds a bit like London’s Mr. Justice Lewison.

    Stay tuned.

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    The Stanford Saga – Chapter 5: The Liquidators Strike Back

    Saturday, June 27th, 2009

    Nearly two weeks ago, this blog highlighted further scuffling in the ongoing contest for administrative control between Ralph Janvey – a federal receiver appointed at the SEC’s behest to seize and administer financial assets once controlled by Sir Allen Stanford, and Peter Wastell and Nigel Hamilton-Smith – English liquidators charged with liquidating Stanford International Bank, Ltd. (SIB), an Antiguan entity through which Stanford did significant amounts of business.

    To summarize prior posts – available by linking here – Wastell and Hamilton-Smith have sought recognition of SIB’s Antiguan liquidation through a Chapter 15 case commenced before U.S. District Judge David Godbey in Dallas.  Janvey, along with the SEC and the Internal Revenue Service, vehemently oppose recognition of the Antiguan liquidation as the “main proceeding” in the Stanford entities’ administration.

    In an extensive brief filed earlier in the month, Mr. Janvey – joined by the SEC in separate briefing – detailed his reasons for doing so.  In essence, Mr. Janvey and the SEC claim that the “center of main interests” (COMI) of an investment fraud – which the SEC alleges Stanford perpetrated – is headquartered where the fraud is . . . and not from the presumptive location where the victims were led to believe a legitimate business was run.  They also appear to place heavy reliance on the fact that, though SIB was physically located in Antigua, it was not authorized to do regular business with local residents – and its liquidation therefore resembles numerous hedge fund liquidations that, to date, have experienced difficulty obtaining recognition as foreign “main proceedings” in other US Bankruptcy Courts.

    This week, Mess’rs. Wastell and Hamilton-Smith answered Janvey’s argument.

    In a 25-page reply brief, supported by extensive Appendices, Wastell and Hamilton-Smith explain that Janvey’s “fraud-based” argument is beside the point – as is the fact that SIB was maintained primarily for “offshore” operations in the US, South America, and Europe.

    Instead, the liquidators claim that the extent of SIB’s physical operations in Antigua make its liquidation far different from the “letter-box” entities in Caribbean tax havens that US Bankruptcy Courts have, to date, been reluctant to recognize.  Wastell and Hamilton-Smith rely heavily on a California decision – In re Tri-Continental Exch. Ltd., 349 B.R. 627 (Bankr. E.D. Cal. 2006) – which involved alleged “sham” insurance entities that sold fraudulent insurance policies to US citizens through a network of domestic brokers and agents, but whose 20 employees and only office were operated in St. Vincent and the Grenadines.  Over the objection of a US judgment creditor, the U.S. Bankruptcy Court in Tri-Continental recognized as the foreign “main proceeding” a liquidation commenced through the Eastern Caribbean Supreme Court, holding that even through the fraud was perpetrated primarily in the US and Canada, the debtors’ COMI was in St. Vincent and Grenadines because the debtors “conducted regular business operations” there.  349 B.R. at 629.

    Using this analysis, Wastell and Hamilton-Smith argue that SIB’s Antiguan liquidation should likewise be recognized as a foreign “main proceeding” since, as even Mr. Janvey acknowledges, a debtor’s COMI is tantamount to its “principal place of business” under US law.  According to the liquidators, a debtor’s “principal place of business” is essentially the location of its “business operations,” and their brief refers repeatedly to SIB’s extensive physical and administrative operations in Antigua.  Wastell and Hamilton-Smith appear to tiptoe around Mr. Janvey’s argument that the Court should look to the debtor’s “nerve center” (in this case, the location of executive decisions) where a business’s operations are “far-flung,” using a brief (and conclusory) footnote to draw a distinction between the Stanford entities’ admittedly “far-flung” sales, on the one hand, and its operations on the other – which, according to the liquidators, were concentrated exclusively in Antigua.

    Judge Godbey’s appointed examiner is due to weigh in on these issues shortly after the US July 4 holiday.

    Stay tuned.

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    The Stanford Saga – Chapter 4: Where Is a Ponzi Scheme “Headquartered,” Anyway?

    Tuesday, June 16th, 2009

    This blog has intermittently followed the Texas-sized contest for control over now-defunct financial and investment entities once operated by Sir Allen Stanford.  That contest has pitted Antiguan liquidators Peter Wastell and Nigel Hamilton-Smith against federal receiver Ralph Janvey.  Prior posts are located here, here, and here.

    Approximately one month ago, US District Judge David Godbey permitted Messr’s. Wastell and Hamilton-Smith to commence a Chapter 15 case on behalf of Stanford International Bank (SIB), headquartered in Antigua.  A hearing regarding the liquidators’ request for US recognition of SIB’s liquidation is tentatively calendared for mid-July.  The parties have submitted a joint status report and have also filed further briefing on the question of the Stanford entities’ “Center of Main Interests” (COMI) – which the parties believe will determine the location of a “main proceeding” for the Stanford entities, and will further determine what (if any) recognition US courts will give that proceeding.

    Briefing and evidence submitted to date provides a preview of the parties’ positions, as well as on the issues that the Judge Janvey will need to address:

    COMI.  A supplemental affidavit submitted by Mr. Hamilton-Smith in support of recognition appears to stress both (i) SIB’s corporate separation from other Stanford entities; and (ii) its function as the effective “nerve center” of global Stanford investment operations.  In a 50-page response to the Liquidators’ petition for recognition, Mr. Janvey argues that (i) the Stanford entities’ principal interests, assets, and management are not in Antigua; (ii) SIB was a mere “shell” for a fraudulent scheme headquarted in, and implemented from, the US; and (iii) COMI is the location from which the fraud emanates, and not from the location where investors have been duped into believing a legitimate business was run.  And lest we forget matters of policy, the Receiver offers the somewhat conclusory arguments that because a receivership (rather than a bank liquidation) is the appropriate means of investigating a fraud, because the Antiguan government is somehow too close to this liquidation, and because the liquidators have allegedly attempted to “end run” the Receivership by obtaining a recognition order in Canada (an allegation bitterly contested by the Antiguan Liquidators), recognition of a Chapter 15 would be against public policy.  A concurrent response filed by the SEC largely concurs in these arguments.  The SEC appears to rely heavily on the US citizenship of Mr. Stanford and most members of his board of directors (in fact, “Sir Allen” holds joint US-Antiguan citizenship), the purported location of management decisions (according to the SEC, within the US), and the comparative dollar volume of SIB investment sales in the US as the primary basis for opposing the request to recognize SIB’s Antiguan liquidation as the “main proceeding.”

    Substantive Consolidation?  The parties’ briefs to date raise the issue of substantive consolidation (or “aggregation”).  The Liquidators advise Judge Godbey that they expect the Receiver to argue in support of substantive consolidation of the Stanford entities.  Mr. Janvey never directly addresses his position on substantive consolidation, calling it a “bankruptcy question” which is appropriate only in the event that multiple Stanford entities find themselves in bankruptcy in the US (a possibility triggered by filings briefly mentioned below).  However, Janvey goes on to reiterate his position that the Stanford entities must be treated as part of a single, integrated receivership, since the Stanford entities operated as a single “integrated network.”

    Involuntary Proceedings?  The parties’ joint status report mentions a request by certain investors for permission to file involuntary bankruptcies in the US against one or more of the Stanford entities.  That request has been opposed by the Receiver, who argues that rather than bankruptcy, a federal receivership (i) is really the best way to adminsiter an alleged Ponzi scheme; (ii) protects creditors’ and investors’ due process (and bankruptcy doesn’t?!); and (iii) provides the maximum degree of flexibility, essential to the equitable relief and redress this case requires.  The Examiner disagrees with the Receiver, suggesting that Judge Godbey can – and, indeed, should – evaluate the relative merits of a bankruptcy (rather than a receivership) for the Stanford entities, but cautions that the investors must demonstrate the relative benefits of such a proceeding vis á vis a receivership.

    Cooperation?  In a now-familiar refrain, the Receiver and the Antiguan Liquidators blame each other for failing to cooperate, all the while holding out their own respective proposed cooperation schemes.  Mr. Hamilton-Smith’s affidavit (mentioned above) proposes a general framework of cooperation in the event that a request for recognition of SIB’s liquidation is approved.  The same investors seeking permission to commence an involuntary proceeding (also mentioned above) argue that, in fact, Chapter 15 provides the best vehicle for cross-border coordination no matter where the “center of main interests” is ultimately determined.

    Further briefing – and some decisions – are due later in the month.

    Overall, it’s shaping up to be a hot summer in Texas.

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    The Stanford Saga – Chapter 3: Antiguans 1, Receiver 0

    Monday, May 25th, 2009

    Last week’s blog post (here) covered early skirmishing between SEC receiver Ralph Janvey and Antiguan liqudators Nigel Hamilton-Smith and Peter Wastell over control of the assets and business entities once operated by Sir Allen Stanford – and which the Securities and Exchange Commission (SEC) alleges furthered an elaborate international Ponzi scheme.  Court pleadings describing the Stanford entities, the alleged Ponzi scheme, and the federal receivership instituted at the SEC’s behest are available here.

    Readers of last week’s post may recall that the primary bone of contention between Janvey and his Antiguan counterparts was whether or not the Antiguans – Messr’s. Nigel Hamilton-Smith and Wastell – should be permitted to seek American recognition of their liquidation of Stanford International Bank, Ltd. (SIB) while a US receivership of Stanford assets (including SIB, and superintended by Janvey) remains pending in Dallas’s U.S. District Court.  The Antiguan liquidators requested that District Court Judge David Godbey permit them to seek recognition.  The receiver, supported by the SEC (and joined by the IRS), objected.

    Judge Godbey’s response was immediately forthcoming.  In a short, 5-page Order issued late last Friday, he authorized the liquidators’ request and modified his prior receivership Order to permit the liquidators to commence a Chapter 15 proceeding and seek recognition of their Antiguan liquidation.

    Two things are worth noting about Judge Godbey’s Order.  First, the mere authorization to seek recognition is no guarantee recognition will be granted.  While recognizing the Congressional intent behind Chapter 15 (i.e., greater international cooperation, greater certainty for trade and investment, fair and efficient administration, etc.), Judge Godbey nevertheless directed the parties to confer regarding a process by which to determine whether the Antiguan liquidation should be recognized.  The Court no doubt anticipates what the Examiner has already identified: a looming fight over SIB’s eligibility for Chapter 15 relief.  More specifically, the parties will provide evidence on the question of whether SIB is a “foreign bank” with a “branch” or “agency” in the US – and, therefore, ineligible for Chapter 15 recognition under Section 1501(c)(1) (which incorporates Section 109(b) by reference). 

    Second, where recognition is appropriate, a prior post asked whether Judge Godbey might not use his broad discretion under Chatper 15 to fashion and direct the mutual cooperation that Congress envisioned – but that to date, has apparently slipped from the parties’ view.  Judge Godbey’s Order suggests that where SIB’s liquidation can be recognized, he may do so: In a brief acknowledgement his own broad discretion, Judge Godbey’s Order notes that “[a]s a practical matter, the mechanism of Chapter 15 is precisely designed to effect coordination between entities like the Antiguan Liquidators and the Receiver.”

    Meanwhile, the Antiguan liquidators and the receiver have until May 29 to confer, jointly prepare, and submit a status report outlining a proposed procedure for moving forward with the request for recognition.

    The devil, as they say, is in the details.

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