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Wednesday, October 17, 2012

110 years for Allen Stanford

ABOUT THE AUTHOR: Tim Prudhoe TEP is a Partner and Barrister at Kobre & Kim LLP


On 14 June 2012, financier and cricket mogul Allen Stanford was sentenced to 110 years in jail, having been convicted on 13 of 14 charges against him arising from his involvement in a USD7 billion Ponzi scheme.

While the legal saga is far from over, financial realities may spell a US victory. The recent US decision on (or, more specifically, against) the application for, in effect, primacy of the Antiguan liquidation in respect of Stanford International Bank (SIB) goes a long way towards making the assets of all Stanford entities available to all creditors of those entities, including the US Internal Revenue Service (the IRS). Excluding any reversal on appeal, the adverse implications for the (many) victims of the Stanford Ponzi scheme run through SIB are certain to be dire.

It is a depressing, post-Madoff world where a fraudulent scheme as large as USD7 billion seems barely newsworthy. However, the Stanford saga, and in particular the recent decision for Chapter 15 recognition of the Antiguan liquidation as the main insolvency proceedings, continues to have significant implications for cross-border insolvency, with a particular focus on international financial centres (so-called offshore tax havens).

The Stanford US receivership (note, not bankruptcy) decision of 30 July 20121 deals with many issues, including determination of the centre of main interest (COMI) for a company involved in cross-border insolvency proceedings. It found in favour of the US receiver, dismissing the Antiguan attempt for ‘main proceedings’ status, and instead granting it ‘foreign non-main proceedings’ (i.e. ancillary) status. Notice of the Antiguan liquidators’ appeal against that decision was filed on 7 August 2012.

110-year sentence
The jury trial in Houston (US v Stanford 09-cr-342, US District Court, Southern District of Texas) lasted six weeks, with Stanford’s lawyers arguing that the scheme was the design of his Chief Financial Officer and requesting a mere 44-month sentence. In contrast, US Department of Justice prosecutors recommended the statutory maximum of 230 years, stating ‘[it]will not get anyone their money back but on sleepless nights they will know that [Stanford] got the maximum’. During his 40-minute statement in court Stanford denied culpability, saying ‘I’m not here to ask for sympathy or forgiveness or to throw myself at your mercy… I did not run a Ponzi scheme. I didn’t defraud anybody.’ The presiding judge, David Hittner, described Stanford’s actions as ‘egregious criminal frauds’, while one victim spokeswoman, Angela Shaw of the Stanford Victims Coalition, stated that Stanford ‘stole more than millions… he stole our lives as we knew them’. Stanford’s sentence is 40 years shorter than that handed down to Bernard Madoff, whose Ponzi scheme was estimated at USD17.3 billion. However, Shaw stated that Stanford’s conduct was worse than that of Madoff because he preyed on middle-class rather than wealthy investors.

From the perspective of extracting value for the many victims, the real battle over where the insolvency proceedings should be heard is still being played out. The Antiguan liquidators have already managed to halt efforts by the US Department of Justice (DoJ) to repatriate tens of millions of dollars of frozen Stanford assets to the US from the UK, Canada and Switzerland. The oral hearing on the Chapter 15 application made to the US courts by the Antiguan liquidators for recognition of Antigua as the foreign main proceeding took place in early December 2011. The adverse effect of a protracted wait for a decision was such that on 23 July 2012 a formal court pleading was actually filed solely to ask the Court for a decision2. Subject to the pending appeal, this decision will be key to the future direction of the Stanford saga as we move past the fate of Stanford himself.

Procedural history of the SIB insolvency
Of the many steps in the complicated procedural background to the insolvency, the following are particularly noteworthy:
  • 16 February 2009: the US Securities and Exchange Commission (SEC) applied successfully to the Northern District Court of Texas for an order appointing a US receiver over the assets of SIB and Stanford.
  • April 2009: two orders issued by the UK High Court froze all SIB assets held in the UK following an application by the Serious Fraud Office, acting on behalf of the DoJ. The US was granted a similar restraint order for around USD140 million of assets held in Switzerland.
  • 15 April 2009: the Court of Antigua granted an order for the liquidation of SIB and for the appointment of Mr Wastell and Mr Hamilton-Smith as its joint liquidators. This order meant that all of the assets of SIB, wherever situated, were vested in the Antiguan joint liquidators.
  • 22 April 2009: the Antiguan liquidators applied to the High Court in England under Article 15 of the Model Law for an order for recognition of the Antiguan liquidation of SIB as the ‘foreign main proceeding’.
  • 8 May 2009: the US receiver also applied to the English High Court for recognition of the US receivership of SIB.
  • June 2009: the competing recognition applications of the Antiguan joint liquidators and the US receiver were heard by Lewison J. He accepted the application of the Antiguan liquidators and dismissed that of the US receiver.
  • 25 February 2010: the English Court of Appeal3 held that the US receiver was not a ‘foreign proceeding’ within the meaning of that expression as defined in Article 2(1) of the Model Law (and that the Antiguan liquidation was a foreign proceeding). It held that SIB’s COMI was Antigua.
  • 12 May 2011: the High Court of Justice for Antigua and Barbuda appointed Marcus Wide and Hugh Dickson of Grant Thornton as the new liquidators for SIB (the Antiguan liquidators).
  • 5 December 2011: the Antiguan liquidators applied to the US District Court seeking recognition of a foreign main proceeding.
  • 16 January 2012: Gloster J, in the Central Criminal Court in London, upheld the restraint order but ruled that the Antiguan liquidators should be granted a USD20 million line of credit from the assets to help fund the liquidation and realisations.
  • 23–25 January 2012: SIB applied to the UK Supreme Court for permission to appeal the freezing order. The respondent applied for permission to cross-appeal in respect of the decision of the Court of Appeal to quash the original order.
  • 15 February 2012: the UK Supreme Court granted permission to appeal. Judgment on the freezing order is unlikely to be given before 2013.
  • 10 April 2012: the same Texas judge hearing the recognition application by the Antiguan liquidators issued a request for evidence (a letter of request) to the English Court, the basis for which was to completely ignore the current primacy of the Antiguan liquidation.
  • 3 July 2012: Judge Robert Wilkins for the US District Court for the District of Columbia ruled against the SEC, which wanted the Securities Investor Protection Corp (SIPC) to start liquidation proceedings for the victims4. The SIPC previously handled high-profile liquidations such as Madoff’s Ponzi scheme but here maintained that it did not have jurisdiction over Stanford’s offshore bank. Although the Texas-based brokerage Stanford Group Company was a SIPC member, SIB was not. The judge agreed and found that the SEC did not meet its legal burden of showing why the SIPC should be compelled to act. The SEC has 60 days to decide whether or not to appeal the judge’s ruling; the agency is said to be ‘reviewing the decision’.
Statutory framework for cross-border insolvency
The legal framework within the US for recognition of cross-border insolvency is Chapter 15 of the Bankruptcy Code, which is based on the UNCITRAL Model Law. It came into force in 2005 and has been successfully invoked many times, especially since the financial crisis of 2008 (Fairfield Sentry, BVI and New York; Millennium Global Emerging Credit Master Fund, Bermuda and New York).

Under Chapter 15, an application can be made for insolvency proceedings in another jurisdiction to be recognised as a ‘foreign proceeding’ in the US. Section 101(23) of the Bankruptcy Code defines a foreign proceeding as ‘a collective judicial or administrative proceeding in a foreign country… under a law relating to insolvency… in which… the assets and affairs of the debtor are subject to control or supervision by a foreign court for the purpose of… liquidation’. Section 1517(b) provides that a foreign proceeding ‘shall be recognised… if it is pending in the country where the debtor has the center of its main interests; [n.b. which was refused in the decision of 30 July 2012] or… if the debtor has an establishment within the meaning of section 1502 in the foreign country where the proceeding is pending’. This second scenario (foreign non-main) was the limited recognition granted in the 30 July 2012 order.

The fight between the US court-appointed receiver and the Antiguan liquidators over which jurisdiction has the main insolvency proceedings will now continue on appeal. Unless that appeal succeeds, the Antiguan liquidators will not be able to assume the rights of a US bankruptcy trustee in US courts.

The decision of the Texas Court covers 60 pages, of which 46 are devoted to the discussion of ‘foreign main’ versus ‘foreign non-main’. From page 16 onwards there is a helpful review of the following:
  • The right to sue and be sued in US courts, as well as the authority to apply directly to the US courts for other relief (such as stays, injunctions, examine witnesses) is an automatic result of recognition as ‘foreign main’, but not automatically for ‘foreign non-main’ proceedings.
  • The Antiguan Stanford proceeding had the necessary ‘collective’, judicial, foreign and insolvency nature by which to satisfy the Chapter 15 test.
  • The test – at least from the US perspective – for COMI is widely cast.
COMI
In general terms, the English position is a rebuttable presumption that the COMI will match the jurisdiction of the company’s registered office. Again in general terms, the position under US Chapter 15 is more expansive, with the registered office having only evidential value, and control and management of assets carrying much more weight.

As is well known, this issue was previously examined in the Stanford English High Court decision5 and then by the English Court of Appeal6, with both courts ultimately holding that the COMI was Antigua rather than the US. The courts also held that the Antiguan proceeding was the ‘foreign main proceeding’. Although this gave the Antiguan liquidators rights to SIB’s assets, these rights were quickly blocked by the restraint order granted in favour of the DoJ. Both the DoJ (via its agent the Serious Fraud Office) and the Antiguan liquidators appealed to the Supreme Court and the judgment is still pending (although the Antiguan liquidators were granted a USD20 million loan from the SIB assets to fund their proceedings). It will be interesting to see what the Supreme Court’s interpretation of the COMI test will be.

The term COMI has not been defined in any of the legislation governing cross-border insolvency: the UK Cross Border Insolvency Regulations 2006, the Model Law, the relevant provisions of the EU Insolvency Regulation (the Regulations) or the US Bankruptcy Code. The presumption under Article 16 of the Regulations that a company’s registered office is its COMI is often called into question if a company’s operations are handled elsewhere. In the case of the UK Stanford litigation, it was found that this presumption could not be rebutted. The registered office of SIB, its headquarters, accounting departments, human resources departments and 88 of the bank’s 93 employees were all based in Antigua and were subject to Antiguan regulation. Most of the bank’s senior managers resided in the US or the US Virgin Islands and board meetings were usually held by telephone. The bank’s network had a global reach; its investors were not purely US based, and assets were held in the US, the UK, Switzerland and Canada.

Proliferating corporate fictions would protect sinister characters such as Ponzi schemers who may target offshore jurisdictions to run their fraudulent empires
While awaiting a ruling in Texas on the Chapter 15 recognition application, the Antiguan liquidators filed, in support of their position, a decision on the issue of COMI on 3 July 2012. This was the decision of 25 June 2012 to uphold the Bankruptcy Court’s ruling in In Re Millennium Global Emerging Credit Master Fund Ltd, 11 CIV 7865-LBS, which affirmed that: ‘(i) each debtor has a “center of main interest”; (ii) that the “center of main interest” is discerned objectively; and (iii) that the debtor’s recognition as a foreign main proceeding was not manifestly contrary to the public policy of the United States.’ In the Millennium case the Court held that it is the petitioner’s burden to show that the debtor’s COMI is the location of the foreign proceedings or, alternatively, that the debtor has an establishment in that place.

A favourable decision in Texas would have been a real game changer for the Antiguan liquidators, granting control over the funds already frozen in UK and Switzerland.

The Texas Court’s reasoning on COMI
First, the Court was prepared to apply the ‘corporate disregard’ doctrine (i.e. to step around the issue of separate corporate personality) to the (many) Stanford entities, and did so on the basis of the acknowledged fraud. It therefore applied COMI analysis to the aggregated Stanford entities and in doing so applied ‘federal principal place of business’ doctrines:

‘It is axiomatic that a corporation is a legal entity existing separate and apart from the persons composing it and entities related to it. However, courts equally accept that they should disregard the corporate form where that form was the means to a subversive end.’ (Page 20 of the judgment.)

‘… disallowing corporate disregard doctrines would proliferate recognition of foreign proceedings that have no real or rightful interest in liquidating the real estate. Proliferating corporate fictions in the Chapter 15 context would also protect sinister characters such as Ponzi schemers who may target offshore jurisdictions to run their fraudulent empires.’ (Page 23 of the judgment.)

Judge Golbey was careful to cite authority for this approach in not only the 5th Circuit of Appeals (i.e. the one encompassing Texas) but also the 1st, 7th, 9th and 11th Circuits as well. The absence of consolidated financials among the various Stanford entities was rejected as insignificant on the basis that the financial statements were manufactured or altered fraudulently anyway.

Secondly, the presumption as to registered office equating to COMI was taken as (i) rebutted by the US receiver and (ii) insufficiently proved as being Antigua. The COMI analysis to be extracted is as follows:

  1. Important that the COMI is ascertainable to third parties: insolvency is a foreseeable risk and a debtor’s potential creditors must be able to calculate permissible risk.
  2. COMI determination is based on the debtor’s administration, management and operations, along with whether reasonable and ordinary third parties can discern where the debtor is conducting these various functions.
  3. The test (at least in the US context) is analogous to the ‘principal place of business analysis’ or ‘nerve centre’ test7, and the registered office might give (at best) insight.
  4. The factual findings against the Antiguan liquidators were (p50 of the judgment):
  5. SIB was only nominally headquartered in Antigua.
  6. SIB’s major activities, certificates of deposit sales and fund investment took place outside Antigua, and a substantial number of the aggregated Stanford entities were headquartered outside Antigua.
  7. The senior management of the aggregated Stanford entities based outside of Antigua (and in the US).hThe primary assets of the Stanford entities were held outside Antigua.
  8. Most of the investor victims/creditors reside outside Antigua.jThe Texas Court is the jurisdiction locus (i.e. hub) of the Stanford entities.
  9. The nerve centre of the Stanford entities is in the US.
Runner-up prize for Antigua: ‘foreign non-main proceeding’
This was not sought in the petition and did not have to be. A favourable finding on ‘foreign non-main proceedings’ from the US perspective requires a ‘local place of business’ in that jurisdiction, and this was found in respect of Antigua:

Physical structures there.578 Antiguan clients: 31 individual and 547 trust and corporate entities (2 per cent of total SIB customers and 4 per cent of total monies invested) 3 SIB employees carried out functions in relation to three types of accounts, credit cards, loan facilities, letters of credit, letters of guarantee and private banking services.SIB issued loans to the Antiguan government.

This equated to ‘a measurable amount of local business in Antigua sufficient to have an establishment there’ (p53 of the judgment)
.
Recognition in this much more limited way (i.e. as an ancillary proceeding, lacking primacy, real power and any practical abilities other than a recognised basis by which to seek US court relief) did not come without heavy criticisms of the Antiguan liquidators for the following (p54 onwards in the judgment)
:
  1. The prior liquidators’ behaviour in Canada in terms of destroying computer records;
  2. Efforts to unseat the US receiver as recognised foreign representative in Canada;
  3. Challenges to DoJ criminal seizures in Canada, the UK and Switzerland;
  4. The preference for a US bankruptcy rather than the current receivership (criticised by the US Court as the basis for delay and disruption).
On the basis of these criticisms only limited relief was granted to the Antiguan liquidators, for example the taking of evidence: ‘[t]his limited relief facilitates the Joint Liquidators’ US discovery needs related to the Antiguan liquidation’. This was made conditional on the following:

  1. The Antiguan liquidators making available to the US receiver and the US Securities and Exchange Commission (SEC) any and all records the Antiguan liquidators have;
  2. The Antiguan liquidators attempting (by ‘best efforts’) to allow the US receiver reciprocal rights in the Antiguan courts;
  3. The Antiguan liquidators not disrupting the efforts of the US receiver or the SEC;
  4. The Antiguan liquidators not duplicating their efforts;
  5. The Antiguan liquidators not initiating US court actions, but instead consulting with the US receiver and attempting to adopt a common claims and distribution process for victims.
Further, the US Court was not troubled by the fact that permission for any of these requirements would be necessary in the Antiguan context:

‘To the extent that the Joint Liquidators require a court order from Antigua to comply with the above conditions, the Court leaves it up to the Joint Liquidators to attempt to obtain one. This Court will not modify its conditions simply because the Joint Liquidators are unable to secure the authority to comply.’

The Antiguan liquidators could be forgiven for feeling somewhat shell-shocked, and it will be interesting to see the reaction of the Antiguan Court on the necessary application(s).

Location of the assets and next steps, pending the outcome of the appeal by the Antiguan liquidators
It is believed that SIB has around USD8 billion in assets located all over the world, with 92 per cent of these assets yet to be traced. This sum is made up of 30,000 depositors in 100 different countries. 15.74 per cent of these depositors are US nationals, representing 22.21 per cent of the actual investments. Depositors from Latin America represent 71.17 per cent of total depositors and 58.56 per cent of investments. Before the decision of 30 July 2012, it was thought that these figures speak for themselves on this issue of whether it is accurate for insolvency proceedings to be carried out in the US and whether dealings with victims of the scheme should be characterised as necessarily US-centric.

On the part of the Antiguan liquidators, their latest ‘Communication to Creditors’ (dated 20 July 2012) reveals their perspective on the proceedings and requests patience from the investors:

‘The question to ask yourself is, “Do I want a small return at some future date, when the appeal process undertaken by Stanford in the US has run its course?” or “Do I want an earlier distribution recognizing that a small part will be invested to significantly increase my ultimate recovery?”’

Those questions now appear irrelevant in light of the recent Texas decision. The more pertinent question is now whether there will be any assets left to distribute now that the creditor pool has been aggregated by the US Court.
  1. Northern District Court of Texas (Dallas) Civil Action 3:09-CV-00721-N (Judge Godbey), 30 July 2012
  2. ‘The lack of a ruling is causing severe prejudice to the [Antiguan joint liquidators]. Among other things, the absence of a ruling is:
  3. Re Stanford International Bank Ltd (In Liquidation) [2010] EWCA Civ 137
  4. SEC v Stanford International Bank Ltd and Others, Civil Action No 3:09–CV–0298–N
  5. In Re Stanford International Bank Ltd [2009] EWHC 1441 (Ch)
  6. In Re Stanford International Bank [2010] EWCA Civ 137
  7. Which itself was subject to recent (2010) review in the US Supreme Court decision of Hertz Corp v Friend, 130 S Ct 1181, 1192

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