Frank v. Commonwealth of Antigua and Barbuda, No. 15-10717, consolidated with The Official Stanford Investors Committee v. Antigua and Barbuda, No. 15-10788 (5th Cir. Nov. 22, 2016) [click for opinion]
The Commonwealth of Antigua and Barbuda ("Antigua") successfully appealed a district court ruling that under certain exceptions to the Foreign Sovereign Immunities Act (the "FSIA"), Antigua was subject to suit relating to its alleged involvement in the Stanford Ponzi scheme. Finding that the commercial activity exception to sovereign immunity was not satisfied and that the waiver exception applied only to claims for which jurisdiction was conceded by Antigua, the Fifth Circuit reversed the district court's determination that it had jurisdiction over certain claims against Antigua, a foreign nation, and remanded for further proceedings.
The plaintiffs in two putative class actions filed suit alleging Antigua was involved and complicit in the Ponzi scheme perpetrated by Allen Stanford. Stanford owned and operated numerous financial entities, including an offshore bank in Antigua, which he used in his scheme to defraud investors. Plaintiffs alleged that Antigua actively and willingly participated in Stanford's scheme and knowingly provided Stanford and his businesses a safe harbor from regulatory scrutiny. They asserted that Stanford and Antigua had a quid pro quo relationship in which Stanford paid incentives and bribes and made loans to Antigua and its public officials to ensure that he and his organizations were deemed compliant with relevant local regulations. The two putative class actions were consolidated for appeal solely to address whether, under the FSIA, Antigua is subject to the jurisdiction of U.S. courts.
The FSIA is the sole source of subject matter jurisdiction in litigation against a foreign state. Generally, foreign states are immune from the jurisdiction of U.S. courts. However, the FSIA includes exceptions which, if applicable, permit a U.S. court to exercise subject matter jurisdiction over a foreign state. In this case, Plaintiffs argued that the commercial activity exception and the waiver exception of the FSIA authorized the exercise of jurisdiction over Antigua.
On appeal, Antigua successfully contested the application of the commercial activity exception as to certain of Plaintiffs' non-contract claims, arguing that its actions did not cause any "direct effect" in the U.S. The commercial activity exception provides that a foreign state is not immune from suit in the U.S. when, among other circumstances that may trigger the exception, (1) the suit is based on an act outside the U.S. (2) in connection with a commercial activity of the foreign state elsewhere and (3) that act causes a direct effect in the U.S. Antigua argued that its commercial activity caused no "direct effect" in the U.S. and the Fifth Circuit agreed, concluding that the financial loss to American investors involved in Stanford's Ponzi scheme was not an "immediate consequence" of Antigua's actions. Nor was there a direct effect in the U.S. from Antigua's failure to repay loans, a financial loss which was most directly felt by Stanford as the actual lender in those transactions. Accordingly, because the "direct effect" requirement was not satisfied, the Fifth Circuit concluded the FSIA's commercial activity exception did not apply to bring Antigua within the jurisdiction of U.S. courts.
Plaintiffs also argued Antigua waived sovereign immunity in two loan agreements it entered into with Stanford. However, the Fifth Circuit noted that Antigua conceded the application of the commercial activity exception to these breach of contract claims on the loans, and therefore, the contract claims would proceed under the commercial activity exception regardless of any appellate ruling on the waiver exception of the FSIA. Accordingly, the Fifth Circuit declined to address the scope or propriety of the district court's waiver ruling, and remanded the cases for further proceedings.