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      Insolvency News and Analysis - Week Ending October 17, 2014
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    Posts Tagged ‘“federal receivership”’

    “Equality is Equity”

    Sunday, December 19th, 2010

    The distribution scheme embodied in federal bankruptcy law serves several important functions.  In Chapter 7, the detailed statutory distribution scheme imposes order on the chaos that might otherwise attend the liquidation of business assets.  In Chapter 11, the fixed order of priority claims and the “absolute priority rule” – along with the requirement that similarly situated classes receive identical treatment – provide predictability within the confirmation process and a framework for out-of-court negotiations.

    But not all resolutions of business insolvency afford this level of predictability.  In particular, state and federal receiverships afford the prospect of considerably greater flexibility and discretion on the part of the appointed receiver and the appointing court.

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    The scope of a receiver’s discretion was illustrated early this month by the 7th Circuit Court of Appeals’ approval of a federal receiver’s proposed pro rata distribution of the assets of six insolvent hedge funds.

    SEC v. Wealth Management LLC, — F.3d — 2010 WL 4862623 (7th Cir., Dec. 1, 2010) involved an SEC enforcement action against Appleton, Wisconsin-based investment firm Wealth Management LLC and its principals, alleging, among other things, misrepresentation and fraud.  At the SEC’s request, the Wisconsin District Court appointed a receiver for Wealth Management and its six unregistered pooled investment funds.

    The receiver’s plan, approved by the District Court, was relatively straightforward:  All investors would be treated as equity holders, and would receive pro rata distributions of the over $102 million invested in the funds.  Two investors who had sought redemption of their investments pre-petition disagreed and appealed the receiver’s plan.  The essence of their argument was that Wisconsin law (and Delaware law, which governed several of the funds), required that investors who sought to redeem their investments be treated not as equity holders, but as creditors of the failed funds.  As a result, their redemption claims were of a higher priority than investors who had not sought to withdraw their funds.  The investors also relied on 28 USC § 959(b), which provides that receivers and trustees must “manage and operate” property under their control in conformity with state law.

    The 7th Circuit rejected this argument, finding instead that federal receivers and trustees need not follow the requirements of state law when distributing assets under their control. Holding that “equality is equity,” the court found that to give unpaid redemption requests the same priority as any other equity interest “promotes fairness by preventing a redeeming investor from jumping to the head of the line . . . while similarly situated non-redeeming investors receive substantially less.”

    The Wealth Management decision highlights the flexibility and ambiguity of the receivership system – itself a critical distinction from the well-defined priorities of federal bankruptcy law.  Though the 7th Circuit’s reasoning – rooted in “similarly situated claims” – is consistent with the policy objectives of the Bankruptcy Code, the result is diametrically opposed to the scheme of priorities on which Wealth Management’s investors undoubtedly relied.

    Wealth Management – like many receivership cases – is a case based on federal securities fraud.  But federal and state receiverships are applicable in a variety of contexts – including business dissolutions, directorship disputes, marital dissolutions, and judgment enforcement.  Where a proposed distribution to creditors can be fairly characterized as “equitable” under the circumstances of the case and where it represents a fair exercise of the receiver’s fiduciary duty on behalf of the receivership estate, the flexibility of a receivership may justify its typically high cost.

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    Squeezing the Most Value from Distressed Assets: Is Chapter 11 Always the Best Way?

    Monday, June 21st, 2010

    It is perhaps stating the obvious that Chapter 11 of the US Bankruptcy Code offers a well-known and very flexible means of extracting the most value from distressed assets.  But in these economic times, it is worth remembering that Chapter 11 is by no means the only avenue for addressing insolvency – nor is it always the best . . . or most appropriate.

    Bankruptcy (or “Section 363”) sales have been a time-honored and tested means of moving distressed assets quickly and cost-efficiently from buyer to seller.  But the lack of credit necessary to fund the transition period required for such sales during the recent downturn, combined with a handful of recent appellate decisions which cast doubt on the validity of contested sales, serve as reminders that other transactional structures sometimes work just as well – or even better.

    The folks at Turnaround Management Association (TMA) released a spate of articles last week which illustrate the point: Two of TMA’s pieces (one on ABC’s and Receiverships and one on alternative sale structures for distressed acquisitions) compare and contrast federal bankruptcy proceedings with other means of optimizing the transfer of distressed assets. A third focuses on “strict foreclosures” (or “Article 9 sales”).

    All three are well worth a read.

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    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 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 8: Home Is Where The Corporate Jet Is . . . But Where Is COMI?

    Tuesday, September 8th, 2009

    Several weeks have passed since Antiguan liquidators Peter Wastell and Nigel Hamilton-Smith and federal receiver Ralph Janvey briefed US District Judge David Godbey on the liquidators’ request for US recognition of their proposed Antiguan liquidation of Stanford International Bank, Ltd. (SIB).

    Readers will recall that Messr’s. Wastell and Hamilton-Smith have been at odds with Mr. Janvey, a federal receiver appointed in Dallas’ U.S. District Court for the purpose of administering not only SIB, but all of the assets previously controlled by Sir Allen Stanford (links to prior posts can be found here).  Those assets and their creditors span at least three continents – North America, South America, and Europe – and have spawned insolvency proceedings in several countries.

    One of the preliminary questions in these proceedings is which of them will receive deference from the others.  Of particular interest is which proceeding – and which court-appointed representative – will control the administration of SIB.  The Eastern Caribbean Surpeme Court (Antigua and Barbuda) has found, perhaps predictably, that SIB’s liquidation is to be adminsitered in Antigua.  It also has found that Mr. Janvey has no standing to appear as a “foreign representative” or otherwise on behalf of SIB or other Stanford entities.

    In London, the English High Court of Justice, Chancery Division’s Mr. Justice Lewison reached a similar conclusion in early July.  Based on a determination under English law that SIB’s “Center of Main Interests” (COMI) is in Antigua, he designated Messr’s. Wastell and Hamilton-Smith as “foreign representatives” of SIB for purposes of Stanford’s English insolvency proceedings.

    In Dallas, meanwhile, Judge Godbey has permitted the Antiguan liquidators to commence a Chapter 15 proceeding under the US Bankruptcy Code and to make application for similar recognition of SIB’s Antiguan liquidation in the US.  Messr’s. Wastell and Hamilton-Smith and Mr. Janvey have each briefed the question of whether, under US cross-border insolvency law, that liquidation ought to be recognized here as a “foreign main proceeding” – and, more specifically, whether Antigua or the US is the properly designated COMI for SIB.

    In briefs submitted over six weeks ago, the liquidators urged a finding consistent with that of the English and Antiguan courts.  They argued essentially that a debtor’s “principal place of business” is essentially the location of its “business operations,” and referred repeatedly to SIB’s undeniably extensive physical and administrative operations in Antigua.

    In opposition, Mr. Janvey argued strenuously for a finding that SIB’s COMI is, in fact, the US.  He did so relying largely on the contention that, despite SIB’s physical location and operations in Antigua, Sir Allen allegedly “spent little time in Antigua” – and that Sir Allen effectively managed and controlled SIB from the US.  Mr. Little, the examiner appointed by Judge Godbey to assist him in overseeing the receivership, generally concurred with Mr. Janvey.

    Last week, Mr. Janvey’s contention may have received a set-back.

    The United States Fifth Circuit Court of Appeals recently upheld a detention order confining Sir Allen to the US pursuant to a separate federal indictment issued against him – and in so doing, concurred in the lower court’s conclusion that Sir Allen’s ties to the State of Texas were “tenuous at best.”  The Fifth Circuit’s 3-judge panel recognized that Stanford “is both an American citizen and a citizen of Antigua and Barbuda, and has resided in that island nation for some fifteen years,” and further noted:

    Stanford admitted that he established a new residence in Houston in preparation for his required presence during the pendency of the case against him.  Several of his children have recently moved to Houston to be closer to him during the proceedings.  While Stanford did grow up in Texas, he has spent the past fifiteen years abroad.  His international travels have been so extensive that, in recent years, he has spent little or no time in the United States . . . .  [O]ne of Stanford’s former pilots [testified] that Stanford . . . engaged in almost non-stop travel on the fleet of six private jets and one helicopter belonging to [Stanford Financial Group] and its affiliates . . . .

    On September 1, Messr’s. Wastell and Hamilton-Smith sought leave to file the Fifth Circuit’s order in support of their prior application for recognition, and over Mr. Janvey’s anticipated objection.

    It appears that where Sir Allen’s indictment is concerned, home is where the corporate jet is.

    But where SIB’s liquidation is concerned . . . where is COMI?

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    The Stanford Saga – Chapter 7: Sir Allen Weighs In . . . Sort Of

    Monday, August 10th, 2009

    Since mid-July, Antiguan liquidators Peter Wastell and Nigel Hamilton-Smith and federal receiver Ralph Janvey have awaited Judge David Godbey’s decision on the liquidators’ request for recognition of their liquidation of Stanford International Bank, Ltd. (SIB), now pending in Antigua.

    As discussed in a number of previously-published posts (here, here, here, here, here, and . . . here), Messr’s. Wastell and Hamilton-Smith have been at odds with Mr. Janvey, who was appointed in Dallas’ U.S. District Court for the purpose of administering assets previously controlled by Sir Allen Stanford – including, presumably, SIB.  Stanford’s assets and creditors span at least three continents – North America, South America, and Europe – and have spawned insolvency proceedings in several countries.  Despite the apparent breadth of Judge Godbey’s original receivership order, the liquidators previously requested – and Judge Godbey (over Mr. Janvey’s strenuous objection) granted – a modification to that order for the purpose of commencing a case under Chapter 15 of the Bankruptcy Code on SIB’s behalf.

    While the parties await a ruling on recognition of the Chapter 15 case, Mr. Janvey’s receivership continues forward, with pleadings filed almost daily on a variety of issues.  Among the matters awaiting resolution in the receivership is a request by Sir Allen that raises issues which themselves may impact Judge Godbey’s decision on recognition.

    In early July, Sir Allen filed a seemingly innocuous request for permission to certify tax returns for a number of Antiguan corporations.  He argued that the Antiguan court already had held these companies outside the U.S. District Court’s jurisdiction – and, therefore, outside the jurisdiction of the receivership.  Nevertheless, respect for the U.S. District Court and a preference for consistency between courts regarding the extent of the District Court’s jurisdiction made prudent a request further amendment of the receivership order to permit Stanford’s exercise of these corporate formalities.  A failure to exercise such formalities in short order would, according to Sir Allen, subject the corporations to being stricken from the Antiguan Companies Register.

    About 2 weeks ago, Mr. Janvey fired back with an 8-page opposition.  In it, he argued that (i) the Antiguan court’s refusal to recognize his American receivership remains on appeal; (ii) Mr. Janvey himself never has been provided copies of the returns Sir Allen seeks to certify; (iii) Sir Allen has declined Mr. Janvey’s requests for these returns, apparently, on the basis that doing so would violate his 5th Amendment rights against self-incrimination under the US Constitution; and (iv) should Judge Godbey wish to preserve the Antiguan corporations in question from sanction, he need merely designate Mr. Janvey or his agent to certify the returns.  Janvey’s arguments are based on his fundamental contention that corporate separateness should be disregarded where the corporate form has been used for a fraudulent purpose – and where the corporations in question have been used for this purpose, they ought to be treated as “alter egos” of Stanford himself and therefore are within the ambt of the District Court’s jurisdiction.

    Last Thursday, Sir Allen replied.  Relying once again on the Antiguan court’s prior denial of American jurisdiction over the corporations, Sir Allen insists that Mr. Janvey has no greater jurisdiction than the U.S. Court which appointed him – and that Judge Godbey cannot simply ignore the prior Antiguan ruling.  Further, Sir Allen insists that his prior general assertion of 5th Amendment rights doesn’t justify an inference of fraudulent activity regarding these corporations – and that Mr. Janvey has never provided any other evidence in support of these allegations.

    Distilled to their essence, the parties’ positions closely parallel similar issues relevant to the Antiguan liquidators’ pending recognition request.  They also highlight a number of the complicated questions underlying that request, such as:

    - What should be the effect of the Antiguan court’s prior order regarding Janvey’s receivership?  Should the liquidators’ request for recognition of SIB’s liquidation be treated differently than Stanford’s request to certify returns for the Antiguan companies?  Or should a similar analysis apply to both orders?  How should the U.S. case law doctrine of comity (i.e., American courts’ respect for the rulings of foreign courts) – which informed many prior requests for ancillary relief under the US Bankruptcy Code and which even today informs much of the policy behind Chapter 15 – apply in either case?

    - To what extent, if any, should allegations of fraudulent intent be relevant to determining the Stanford companies’ applicable “center of main interests” (COMI) – a decision critical to the relief that the liquidators seek?  And if the allegations of fraud were relevant, what would be the level of evidence ncessary to establish the requisite fraud?

    - To what extent, if any, must an equitable receivership commenced in aid of a governmental enforcement action arising from alleged violations of US securities laws bend to the statutory provisions of cross-border commercial insolvency law?  And to what extent, if any, is a US Court able to uphold such enforcement in the face of a foreign court’s order (or, as here, multiple orders) apparently limiting its jurisdiction?

    As with the recognition request, the parties now await Judge Godbey’s ruling.

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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 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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