Since the Feb. 17 seizure of Stanford Financial Group assets and investor funds, the Securities and Exchange Commission, investor attorneys, Stanford receiver Ralph Janvey and examiner John Little have been playing a highly volatile game of chicken. The collision point was the looming possibility that Janvey would impose clawbacks upon already-victimized Stanford investors.
Part of the fallout has been Janvey’s highly public attempt to recoup funds for the Stanford estate so that, after the cost of legal fees, printing copies, hiring staff and whatever other expenses he might charge, he can distribute cash to the victims of what the SEC has alleged is an elaborate, $8 billion Ponzi scheme.
He has gone after Stanford advisers in Louisiana, Texas and elsewhere, claiming they should return any commissions or “referral fees” obtained by selling the contested Stanford International Bank certificates of deposit. He’s also sold off properties around the globe and is looking at the investments made into numerous hedge funds and venture capital funds by Stanford’s investment team—part of the portfolio that might have allowed Stanford to pay inordinately high rates of return to investors.
But now Janvey has exceeded what the SEC considers standard operating procedure by pursuing funds from investors who he, in the same lawsuits in which he claws funds back, says are “wholly innocent.” And the SEC, backed by the examiner and a coalition of investors, has spoken out against Janvey’s actions. On July 20, the SEC filed an “Emergency Motion to Modify Receivership Order,” which would strip Janvey of any authority to pursue lawsuits against investors.
As a result, the Stanford receivership is entering new territory. The SEC’s motion, followed by the examiner’s motion and the immense public support for stopping Janvey from further traumatizing investors, means the battle is coming to a head. The U.S. District Court in Dallas will soon decide [possibly before Aug. 3] how to pursue an equitable remedy for all involved.
The first part of the clawback debate began over the small group of investors against whom Janvey has threatened to claw back. “The clawback is what we call an equitable remedy,” says Phil Preis, who is one of the attorneys representing several groups of area investors and who has been vocal in opposition to Janvey’s actions. But Preis, whose clients’ investments made up a total of about $30 million, also says Janvey has his hands tied when it comes to how to execute an equitable clawback.
Because the Stanford Financial Group was an international entity, there are essentially thousands of clients over whom Janvey does not have any authority. This means he can only really claw back funds and assets from those investors either based in the United States or with assets in the United States—making up an estimated 20% of the total client list. That fact, argue Preis, Little and now the SEC, means there is no equitable remedy, especially if assets are only taken back from U.S. victims to distribute internationally.
The SEC’s emergency motion to limit Janvey’s authority says, “Such claims would create further hardship on a small pool of victims, and randomly penalize investors who happen to hold funds in frozen accounts.”
Janvey claims to be able to claw back around “$600 million from 300[-plus] investors that redeemed their CDs prior to the SEC placing Stanford Financial in receivership,” according to a statement from Janvey e-mailed to Business Report by Jordan Gibennus, a spokesman for the receiver with Pierpont Communications.
Even those figures don’t match up with what Janvey said in a June 28 filing. In that Interim Report, Janvey accounted for only $196 million in “estimated recoverable proceeds” to the estate from remaining client accounts. Where the other $400 million in recoverable funds from investors will be obtained has not been made clear in any of Janvey’s court filings or lawsuits.
The second issue that the SEC, investors and the examiner have raised regarding the clawbacks is that Janvey is seeking to claw back not only the interest that investors received from the tainted CDs, but also the principal of any investments that Stanford investors removed from SIB in the months or years leading up to the SEC seizure of assets. This attempt has infuriated the SEC. In its emergency motion, the SEC says the “Receiver’s clawback claims against innocent investors seeking the return of principal are not supported by law and are contrary to Commission practice.”
If Janvey is allowed to pursue this course of action, investors throughout the Baton Rouge area would be facing even further disgorgement of their assets. Wealthy investors who used interest payments from the CDs to fund development projects or for expenses and then cashed out of the CDs for whatever reason would be required to give back all that they invested initially and all of the interest they made.
While some investors might be able to sustain that hit, others, like one Baton Rouge investor who had money with Stanford for 10 years and who declined to let Business Report print his name for fear of retribution from Janvey, says the clawbacks would be devastating.
“I don’t need them to come hit me again when I haven’t done anything wrong,” he says. And he insists that he is one of the lucky ones among the investors. He had funds dispersed throughout different instruments in his portfolio, but the blow would still be traumatic.
It also would be catastrophic to smaller investors, like many of those Exxon retirees who put as much as half, if not all, of their Individual Retirement Accounts into CDs through the Stanford Trust Co. Debbie Dougherty, the sister of State Rep. Bodi White, and her husband Kenny say Janvey’s actions would wipe them out. Dougherty says she and her husband, who were invested with Stanford adviser Michael Word, pulled their cash out of the SIB CDs in January. When federal officials stormed Stanford offices, her roughly $500,000 [more than half of their IRA portfolio] sat on a desk there until the middle of July. The receivership transferred her money into her Pershing account [which handles her other investments, primarily Exxon stock], but she still will not be able to access those funds. That’s because, as Janvey has explained in his lawsuits and numerous court motions, any money investors took out was not their original cash but that obtained from other, later investors.
Now, Dougherty says, Janvey wants the roughly $500,000 from the CDs that she and her husband cashed out before the SEC freeze and the interest they were using for living expenses, about $60,000 a year. “To achieve that,” she says, “they want to liquidate our Exxon stock. They want to take from us $780,000 and divide it amongst everyone in the world.”
Her distant cousin, Ira Causey, and his wife, Nathaline, face a similar situation. The Causeys say they’ve been told Janvey intends to claw back their principal and their interest. The cash to do that would, again, have to be pulled out of IRAs at Pershing, crossing into a very gray area with regard to retirement investment protections.
Preis, who is representing the Doughertys and the Causeys, says that in addition to what the SEC and Little are contesting, instituting clawbacks on IRAs should be prohibited. “The assets of the IRAs are creditor-protected,” Preis says. “This is all running afoul of another protection within the U.S.”
The SEC also claims Janvey’s legal justification for clawbacks on innocent investors is ill-founded. Not only does the SEC say in the emergency motion the “Receiver has misinterpreted the authority upon which he relies,” but it also asserts that “none of the cases cited by the Receiver in apparent support of his view, however, involved claims for the return of principal against innocent investors, and therefore lend no support to the Receiver’s position.”
The SEC then goes case-by-case debunking each argument Janvey has made in support of clawbacks, including his primary supporting case SEC v. George. In that case, the SEC demands disgorgement of particular assets obtained in a Ponzi scheme, including an engagement ring, investments that were over double the investor’s principal and cash from investors who were attempting to funnel off from the receivership additional funds that did not belong to them in the first place. In none of the cases Janvey uses to support his arguments are any of the investors deemed innocent.
Preis says the fact that the SEC is calling Janvey out on his claims is monumental. “[The SEC] said, ‘Look. We’re the client. We want you to do it the way we want you to do it. And we think that you’ve overstepped your bounds.’”
It is a substantial claim. None of the experts who spoke to Business Report have any recollection of a similar situation occurring in the nation’s history. When asked in an e-mail interview, Little says he doesn’t believe the SEC has made another emergency claim to strip power from a Ponzi scheme receiver.
And less than 24 hours after the SEC filed the emergency motion to limit Janvey’s authority and prevent him from clawing back funds from innocent investors, Little filed a motion supporting the SEC. In fact, Little’s filing goes beyond the arguments made by the SEC to claim that Janvey is essentially pursuing clawbacks against investors to the detriment of the entire estate.
“While the Receiver may believe that the pursuit of ‘claw back’ claims may be supported by case law, he cannot believe that it is appropriate to pursue ‘claw back’ claims that will not yield a ‘net recovery’ for the Estate,” says Little. He uses an example that if the Receiver is attempting to claw back $1, it is unreasonable to spend $2 in order to do so. He also refers to the example of 13 clawbacks that Janvey intends to pursue that would only net $365,903.50 before expenses. Once the lawsuits are filed, fought and decided, Little says, Janvey will spend more than he obtains for the estate.
Preis agrees that Janvey is overstepping his authority. “Equity does not mean attacking a few people,” he says. “Especially when it is only going to mean 1%-2% [in return].”
Ultimately, Little, the SEC and investor attorneys like Preis are going to push the court to quickly decide the emergency motion. More time spent fighting over who has authority to do what is more money Janvey makes out of the estate he should be dispersing to Stanford victims.
But Janvey intends to fight the SEC motion, at least with words. In the same statement e-mailed to Business Report, he says, “The Receiver is authorized by court order and obligated by his fiduciary duty to maximize the assets of Stanford Financial. Clawbacks are fully supported by case law and have been upheld as a principal of equality is equity. The Receiver’s duty is to provide the best outcome for all investors, not just the small fraction of those who received redemptions. … The Receiver respectfully disagrees with the SEC on this issue.”
Ultimately the court will decide whether the SEC or Janvey is correct—an outcome those investors and the attorneys who represent them are anxiously awaiting. Even those not immediately impacted stand to either breathe a sigh of relief or cling tight to what funds they were given—especially nonprofits like the Baton Rouge Symphony, LSU cheerleaders or St. Jude’s Children’s Hospital, which were given large donations by Stanford that could now be viewed by Janvey as tainted funds.
As Aug. 3 nears, investors must wait in anticipation of the result of this game of legal chicken. Unless, of course, Janvey flinches first.
