Posts Tagged ‘Securities and Exchange Commission’
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 ‚Äúabsolute priority rule‚ÄĚ ‚Äď along with the requirement that similarly situated classes receive identical treatment ‚Äď 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.
The scope of a receiver‚Äôs discretion was illustrated early this month by the 7th Circuit Court of Appeals‚Äô approval of a federal receiver‚Äôs proposed pro rata distribution of the assets of six insolvent hedge funds.
SEC v. Wealth Management LLC, ‚ÄĒ F.3d ‚ÄĒ 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‚Äôs request, the Wisconsin District Court appointed a receiver for Wealth Management and its six unregistered pooled investment funds.
The receiver‚Äôs 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‚Äôs 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 ¬ß 959(b), which provides that receivers and trustees must ‚Äúmanage and operate‚ÄĚ 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 ‚Äúequality is equity,‚ÄĚ the court found that to give unpaid redemption requests the same priority as any other equity interest ‚Äúpromotes fairness by preventing a redeeming investor from jumping to the head of the line . . . while similarly situated non-redeeming investors receive substantially less.‚ÄĚ
The Wealth Management decision highlights the flexibility and ambiguity of the receivership system ‚Äď itself a critical distinction from the well-defined priorities of federal bankruptcy law.¬† Though the 7th Circuit‚Äôs reasoning ‚Äď rooted in ‚Äúsimilarly situated claims‚ÄĚ ‚Äď is consistent with the policy objectives of the Bankruptcy Code, the result is diametrically opposed to the scheme of priorities on which Wealth Management‚Äôs investors undoubtedly relied.
Wealth Management ‚Äď like many receivership cases ‚Äď 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 ‚Äúequitable‚ÄĚ 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.
Sunday, January 31st, 2010
The market collapse of 2008 and resulting financial crisis have led to significant reflection on a number of systemic features of our financial markets and on the stability of institutions that play significant roles in their function.
That reflection has produced a fresh round of legal scholarship on what role – if any – the federal Bankruptcy Code should play in addressing the financial difficulties of these institutions.¬† In a recent paper, Columbia’s Harvey R. Miller Professor of Law Edward R. Morrison¬†asks, “Is the Bankruptcy Code an Adequate Mechanism for Resolving the Distress of Systemically Important Institutions?”
The issue, at least as¬†put by Professor Morrison in the opening paragraphs of his paper, is framed as follows:
The President and members of Congress are considering proposals that would give the government broad authority to rescue financial institutions whose failure would threaten market stability. These systemically important institutions include bank and insurance holding companies, investment banks, and other “large, highly leveraged, and interconnected” entities that are not currently subject to federal resolution authority.¬† Interest in these proposals stems from the credit crisis, particularly the bankruptcy of Lehman Brothers.
That bankruptcy, according to some observers, caused massive destabilization in credit markets for two reasons.¬† First, market participants were surprised that the government would permit a massive market player to undergo a costly Chapter 11 proceeding. Very different policy had been applied to other systemically important institutions such as Bear Stearns, Fannie Mae, and Freddie Mac.¬† Second, the bankruptcy filing triggered fire sales of Lehman assets. Fire sales were harmful to other, non-distressed institutions that held similar assets, which suddenly plummeted in value. They were also harmful to any institution holding Lehman’s commercial paper, which functioned as a store of value for entities such as the Primary Reserve Fund. Fire sales destroyed Lehman’s ability to honor these claims.
Lehman’s experience and the various bailouts of AIG, Bear Stearns, and other distressed institutions have produced two kinds of policy proposals. One calls for wholesale reform, including creation of a systemic risk regulator with authority to seize and stabilize systemically important institutions.¬† Another is more modest and calls for targeted amendments to the Bankruptcy Code and greater government monitoring of market risks.¬† This approach would retain bankruptcy as the principal mechanism for resolving distress at non-bank institutions, systemically important or not.
Put differently, current debates hinge on one question: Is the Bankruptcy Code an adequate mechanism for resolving the distress of systemically important institutions? One view says “no,” and advances wholesale reform. Another view says “yes, with some adjustments.”
Morrison’s paper sets out to assess this debate, and concludes by advocating [again, in his words]¬†”an approach modeled on the current regime governing commercial banks. That regime includes both close monitoring when a bank is healthy and aggressive intervention when it is distressed. The two tasks – monitoring and intervention – are closely tied, ensuring that intervention occurs only when there is a well-established need for it.” As a result of the close relationship between the power to intervene and the duty to monitor, however, any proposed legislation “is unwise if it gives the government power to seize an institution regardless of whether it was previously subject to monitoring and other regulations.”
Elsewhere in the Empire State, at the University of Rochester, Distinguished Professor Thomas H. Jackson proposes “Chapter 11F: A Proposal for the Use of Bankruptcy to Resolve (Restructure, Sell, or Liquidate) Financial Institutions.“¬† According to Jackson:
Bankruptcy reorganization is, for the most part, an American success story. It taps into a huge body of law, provides certainty, and has shown an ability to respond to changing circumstances. It follows (for the most part) nonbankruptcy priority rules – the absolute priority rule – with useful predictability, sorts out financial failure (too much debt but a viable business) from underlying failure, and shifts ownership to a new group of residual claimants, through the certainty that can be provided by decades of rules and case law.
Notwithstanding its success, bankruptcy reorganization has a patchwork of exceptions, some perhaps more sensible than others.¬† Among them are depository banks (handled by the FDIC), insurance companies (handled by state insurance regulators), and stockbrokers and commodity brokers (relegated to Chapter 7 and to federal regulatory agencies).¬† In recent months, there has been a growing chorus to remove bankruptcy law, and specifically its reorganization process, from “systemically important financial in-stitutions (SIFIs),” with a proposed regulatory process substituted instead, run by a designated federal agency, such as the Federal Reserve Board or the Securities and Exchange Commission.
Putting aside political considerations, behind this idea lie several perceived objections to the use of the bankruptcy process.¬† First, it is argued, bankruptcy, because it is focused on the parties before the court, is not able to deal with the impacts of a bankruptcy on other institutions – an issue thought to be of dominant importance with respect to SIFIs, where the concern is that the fall of one will bring down others or lead to enormous problems in the nation’s financial system.¬† Second, bankruptcy – indeed, any judicial process – is thought to be too slow to deal effectively with failures that require virtually instant attention so as to minimize their consequences.¬† Third – and probably related to the first and second objections – even the best-intentioned bankruptcy process is assumed to lack sufficient expertise to deal with the complexities of a SIFI and its intersection with the broader financial market.
Jackson’s response to this growing chorus of objections is to propose amending existing Chapter 11 legislation.¬† Again, in his words:
The premise of [Jackson's] “Chapter 11F” proposal, which [he] flesh[es] out [in his paper], is that, assuming the validity of each of these objections, they, neither individually nor collectively, make a case for creating yet another (and very large) exception to the nation’s bankruptcy laws and setting up a regulatory system, run by a designated federal agency, that operates outside of the predictability-enhancing constraints of a judicial process. Rather, bankruptcy’s process can be modified for SIFIs – [Jackson's] Chapter 11F – to introduce, and protect, systemic concerns, to provide expertise, and to provide speed where it might, in fact, be essential. Along the way, there is probably a parallel need to modify certain other existing bankruptcy exclusions, such as for insurance companies, commodity brokers, stockbrokers, and even depository banks, so that complex, multi-faceted financial institutions can be fully resolved within bankruptcy.
With views as divergent as these, one might be tempted to look for a fundamental assessment of the differences between the banking regulatory system and the Chapter 11 process.¬† And that assessment is, in fact,¬†available from the Congressional Research Service – which¬†last April provided its own comparison of “Insolvency of Systemically Significant Financial Companies: Bankruptcy v. Conservatorship / Receivership.“¬† As summarized by its author, Legislative Attorney David H. Carpenter:
One clear lesson of the 2008 recession, which brought Goliaths such as Bear Sterns, CitiGroup, AIG, and Washington Mutual to their knees, is that no financial institution, regardless of its size, complexity, or diversification, is invincible. Congress, as a result, is left with the question of how best to handle the failure of systemically significant financial companies (SSFCs). In the United States, the insolvencies of depository institutions (i.e., banks and thrifts with deposits insured by the Federal Deposit Insurance Corporation (FDIC)) are not handled according to the procedures of the U.S. Bankruptcy Code. Instead, they and their subsidiaries are subject to a separate regime prescribed in federal law, called a conservatorship or receivership. Under this regime, the conservator or receiver, which generally is the FDIC, is provided substantial authority to deal with virtually every aspect of the insolvency. However, the failure of most other financial institutions within bank, thrift, and financial holding company umbrellas (including the holding companies themselves) generally are dealt with under the Bankruptcy Code.
In March of 2009, Treasury Secretary Timothy Geithner proposed legislation that would impose a conservatorship/receivership regime, much like that for depository institutions, on insolvent financial institutions that are deemed systemically significant. In order to make a policy assessment concerning the appropriateness of this proposal, it is important to understand both the similarities and differences between insured depositories and other financial institutions large enough or interconnected enough to pose systemic risk to the U.S. economy upon failure, as well as the differences between the U.S. Bankruptcy Code and the FDIC’s conservatorship/receivership authority.
[Carpenter's] report first discusses the purposes behind the creation of a separate insolvency regime for depository institutions. The report then compares and contrasts the characteristics of depository institutions with SSFCs. Next, the report provides a brief analysis of some important differences between the FDIC’s conservatorship / receivership authority and that of the Bankruptcy Code. The specific differences discussed are: (1) overall objectives of each regime; (2) insolvency initiation authority and timing; (3) oversight structure and appeal; (4) management, shareholder, and creditor rights; (5) FDIC “superpowers,” including contract repudiation versus Bankruptcy’s automatic stay; and (6) speed of resolution. This report makes no value judgment as to whether an insolvency regime for SSFCs that is modeled after the FDIC’s conservatorship/receivership authority is more appropriate than using (or adapting) the Bankruptcy Code. Rather, it simply points out the similarities and differences between SSFCs and depository institutions, and compares the conservatorship/receivership insolvency regime with the Bankruptcy Code to help the reader develop his/her own opinion.
Fascinating reading . . . and an awful lot of it.
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 ‚Äúprincipal place of business:‚ÄĚ¬† “The Fifth Circuit applies alter ego doctrines not only to enforce liability against shareholders and parent companies, but also to determine a corporation‚Äôs ‘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 ‚Äúfar flung,‚ÄĚ that SIB‚Äôs Antiguan operations were ‚Äúpassive,‚ÄĚ and that its ‚Äúnerve center‚ÄĚ and ‚Äúplace of activity‚ÄĚ 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 ‚Äúcontracts‚ÄĚ 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‚Äôs 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. ¬ß 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.
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:
- 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.
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:
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.
Monday, October 12th, 2009
Business bankruptcies in the US can be big business for hedge funds trading in distressed debt.¬† But that business may be sharply curtailed – or effectively eliminated – if proposed new disclosure rules in bankruptcy take effect.
In a recent series of articles dealing with these proposed changes, the Hedge Fund Law Report (HFLR) has explored their anticipated impact on hedge funds’ participation in bankruptcy proceedings – and has graciously included¬†in its analysis a couple of quotes by members of South Bay Law Firm.
Some background may be helpful.
Hedge Funds and Rule 2019
Hedge funds have become major participants in recent bankruptcy proceedings, in which they often form unofficial or ad hoc committees in order to aggregate their claims and benefit from the additional leverage such aggregation provides.¬† For example, a committee might seek to consolidate a “blocking position” with respect to a class (or classes) of the distressed firm’s debt, then negotiate for financial or other concessions regarding¬†the debtor’s reorganization plan.¬† Though their investment strategies may differ, hedge funds are typically uniform in their insistence on the privacy and confidentiality of their investments.¬† Further, such secrecy is viewed as necessary to protect the funds’¬†proprietary trading models from duplication.
The fiercely guarded¬†privacy of hedge funds contrasts sharply with¬†the¬†insistence on disclosure that pervades American Bankruptcy Courts.¬†¬†The two¬†have never co-existed comfortably.¬† Bankruptcy Courts and other parties¬†seeking to look behind the veil of secrecy surrounding a participating¬†group of funds have¬†looked for help to¬†Bankruptcy Rule 2019.¬† That Rule essentially requires disclosure of certain information from informal “committees” in a bankruptcy case.
Rule 2019¬†traces its roots to the correction of abuses¬†unearthed in the 1930s, when a series of hearings conducted for the SEC by [as-of-then-yet-to-be-appointed Supreme Court Justice] William O. Douglas uncovered the frequent practice of inside groups (so-called “protective committees”) working with bankrupt companies to take advantage of creditors.¬† Douglas’ investigation uncovered “[i]nside arrangements, unfair committee representation, lack of oversight, and outright fraud [that] often cheated investors in financially troubled or bankrupt companies out of their investments.”
Hedge funds do not occupy the same role as¬†the “protective committees” of 70 years ago.¬† But¬†creditors have nevertheless relied on the Rule’s provision to claim that¬†ad hoc committees must “open the kimono” to reveal not only their members’ purchased positions in the debtor,¬†but the timing and pricing of those purchases.¬† This most hedge funds will not do – at¬†least not without without a very stiff fight.
Reaction to this use of Rule 2019 has been mixed.¬† In a pair of decisions issued in 2007, the Bankruptcy Courts for the Southern District of New York and the Southern District of Texas went in opposite directions, finding that ad hoc committees in the respective cases of Northwest Airlines Corp. and¬†Scotia Development LLC must comply (in New York) or were exempt (in Texas) from the provisions of Rule 2019.¬† The measure of hedge funds’ resistance to this disclosure is gauged by the fact that in the wake of the court’s decision in Northwest Airlines, several funds withdrew from the case rather than divulge the information otherwise required of them.
Proposed Amendments to Rule 2019
On August 12, 2009, the Advisory Committee on the Federal Rules of Bankruptcy Procedure¬†weighed in on this dispute by proposing a significant revision¬†of Rule 2019.¬† The Rule has been essentially re-drafted.¬† According to the Committee Notes, subdivision (a) of the Rule defines a “disclosable economic interest” – i.e., “any economic interest that could affect the legal and strategic positions a stakeholder takes in a chapter 9 or chapter 11 case.”¬† The term is employed in subdivisions (c)(2), (c)(3), (d), and (e), and – according to the Rules Committee that drafted¬†it – is¬†intended to extend beyond claims and interests owned by a stakeholder.
In addition to applying to indenture trustees (as the Rule presently does), subdivision (b) extends the Rule’s coverage to “committees . . . consist[ing] of more than one creditor or equity security holder,” as well as to any “group of creditors or equity security holders that act in concert to advance common interests, even if the group does not call itself a committee.”¬† If these extensions of Rule 2019 weren’t broad enough, subdivision (b) goes even further.¬† It permits the Court, on its own motion, to require “any other entity that seeks or opposes the granting of relief” to disclose¬†the information specified in Rule 2019(c)(2).¬† Although the Rule doesn’t automatically require disclosure by an individual party, the court may require disclosure when it “believes that knowledge of the party’s economic stake in the debtor will assist it in evaluating that party’s arguments.”
Subdivision (c) – and, in particular, (c)(2) – is the heart of the Rule.¬† It requires disclosure of the nature,¬†amount, and timing of acquisition of any “disclosable economic interest.”¬† Such interests must be disclosed individually – and not merely in the aggregate.¬†¬†The court may, in its¬†discretion, also require disclosure of the amount paid for such interests.
Subdivision (d) requires updates for any material changes made after the filing of an initial Rule 2019 statement, and subdivision (e) authorizes the court to determine where there has been a violation of this rule, any solicitation requirement, or other applicable law.¬†¬†Where appropriate, the court may impose sanctions for any such violation.
Though¬†potentially broad-reaching, one of the obvious flashpoints for the amended Rule’s application will be on the¬†continued participation of hedge funds in Chapter 11 cases.
WIll the Amendments Work?
Are the amendments necessary?¬† Or helpful?¬† And how – if at all – will they affect the participation of hedge funds or other parties in Chapter 11 cases?
Comments gathered by HFLR suggest that¬†certain aspects of the amendments may, in fact, assist in blunting the effect of credit default swaps – derivative securities through which the holder of distressed debt can shift the economic risk of¬†the debtor’s¬†obligation to a non-debtor third party, and therfore refuse to negotiate with the debtor.¬† But other¬†provisions may, in fact, permit abuse similar to the type perceived by William O. Douglas’s original investigation: The debtor’s management¬†may¬†use the new Rule in collusion with a friendly committee (or other creditors) to harrass, embarrass, and pressure¬†an individual creditor, who may not be in an economic¬†position to resist this treatment.
Some hedge funds have offered the argument that Rule 2019’s disclosure requirements run afoul of the Bankruptcy Code section 107’s protection of¬†”trade secrets,” which may be protected from the public through the sealing of papers filed with the Court.¬† But is¬†a hedge fund’s trading information in a specific case¬†really a “trade secret?”¬† HFLR quotes South Bay Law Firm’s Michael Good, who notes that “Where hedge funds are concerned, the plausibility of a ‚Äėtrade secret’ argument depends upon what can or can’t be reverse engineered, something that only people with access to and familiarity with the funds’ ‚Äėblack box’ trading models and expertise in understanding them can know.”
To date, Bankruptcy Courts have not been persuaded by the “trade secret” argument.¬† The Bankruptcy Court for the Southern District of New York specifically rejected it in¬†Northwest Airlines.
Even so, Bankruptcy Courts have questioned whether or not case-specific trading information (such as the timing and pricing of a fund’s purchase) is truly relevant to the disclosure issues that arise before them.¬† HFLR cites to the Delaware Bankruptcy Court’s¬†handling of¬†similar concerns raised by parties¬†in the Sea Containers bankruptcy case, where the court ordered attorneys for a group of five bondholders to “revise the 2019 statement to provide the information that’s required by 2019(a)(1), (2), and (3) but not (4) [subsection (4) requires disclosure of the purchase price, which is the information considered most sensitive by hedge fund managers] because I don’t think that [the purchase price] is relevant in any way.”
Many practitioners agree with this assessment.¬† South Bay Law Firm’s Good opined that the Sea Containers court’s balancing of interests “is probably right. I don’t know that it is truly problematic for parties, hedge funds or others, to disclose who they are or what are their aggregate holdings.¬† The problems more commonly arise with the revelation of the price at which they purchased distressed securities, and occasionally with the timing of the purchase.¬† Though it might be relevant in certain circumstances, trading information is often far less relevant than identifying the participants in bankruptcy, their relationships with one another, and the conflicts of interest that can surface through the disclosure of these relationships.”
Why all the fuss, anyway?¬† What’s really at stake with these amendments?
On the one hand, Temple law professor Jonathan Lipson has argued in a recent article¬†that the business bankruptcy process serves an important informational function for the markets and for the economy generally by “outing” poor corporate practices and systemic inefficiencies that can only be addressed and corrected after they’ve seen the light of public scrutiny.¬† Consequently, the proposed amendments should keep the bankruptcy process honest – and are therefore necessary.
But other scholars¬†have suggested elsewhere that the glare of public scrutiny will keep many well-heeled investors out of the distressed investment market altogether.¬†¬†According to them, hedge funds are widely perceived as facilitating more competitive financing terms and increased liquidity in the debt markets.¬† They are also particularly useful in the restructuring process because they can make different types of investments (debt and equity) in a single company.¬† Additionally, their exemption from traditional regulation allows them to quickly adapt their investment strategies to the situation at hand.¬† The proposed amendments to Rule 2019 – and even the proposed application of Rule 2019 in its present form – may effectively remove this “market lubricant” and may further deprive distressed firms of the liquidity they need at a time when they need it most.
Comment on the proposed amendments is due by February 16, 2010.
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.
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.
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 √° 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.
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.