In a recent opinion, the United States Court of Appeals for the Fifth Circuit held that the Texas Uniform Fraudulent Transfer Act allows a receiver to clawback interest payments made to investors under a Ponzi scheme.  Beginning in the 1990s, a network of entities created by R. Allen Stanford sold certificates of deposit to investors through the Stanford International Bank, Ltd., promising extraordinarily high rates of return.  In a classic Ponzi scheme, Stanford used later investors’ money to pay prior investors their promised returns.  The scheme ultimately collapsed, Stanford and CFO James Davis were imprisoned, and the SEC brought suit against Stanford, his agents, and the Stanford entities, alleging federal securities law violations.

The court-appointed receiver over the Stanford entities brought multiple actions under the Texas Uniform Fraudulent Transfer Act (“TUFTA”) to recover funds paid to investors who purchased certificates of deposit as part of the Ponzi scheme and received back their principal, as well as purported interest on the principal.  The Receiver moved for summary judgment on its TUFTA claims against the investor-defendants (described by the court as “net winners” of the scheme), arguing that the payments made to the net winners were fraudulent transfers not made in exchange for reasonably equivalent value.  The United States District Court for the Northern District of Texas granted the Receiver’s motions for summary judgment and ordered the investor-defendants to return funds paid in excess of their original investments.  The investor-defendants filed an interlocutory appeal to the Fifth Circuit, which swiftly rejected each of their arguments and affirmed partial summary judgment in favor of the Receiver.

The investor-defendants first argued that the district court’s choice of law analysis was fundamentally flawed and that Antigua law rather than Texas law should apply.  The Fifth Circuit concluded the district court correctly applied Texas law, as the scheme was centered in, and operated out of, Houston, Texas, and Texas has a substantial interest in the application of its fraudulent transfer laws because the Receiver, many of the Stanford entities, and some of the defrauded creditors and net winners are in Texas.  The court also rejected the argument that the Receiver lacked standing to bring claims under TUFTA, concluding that the Stanford entities, through the Receiver, may recover assets or funds that the entities’ principals fraudulently diverted to third parties without receiving reasonably equivalent value.  The court further rejected the investor-defendants’ statute of limitations argument because the suits were filed less than one year after the fraudulent transfer was, or reasonably could have been, discovered (measured from the date of the CFO’s guilty plea).  In addition, the court determined that IRA accounts containing net winnings to which the investors had no legal right could not be sheltered as assets.

On the merits of the district court’s grant of summary judgment, the Fifth Circuit first addressed whether TUFTA’s element of fraudulent intent was satisfied.  Fraudulent transfer requires that the debtor transferor make the transfer with actual intent to defraud the debtor’s creditors, and in the Fifth Circuit, such intent may be established by proving that a transferor operated as a Ponzi scheme.  Here, it was well-established that the Stanford entities were operated as a Ponzi scheme, thereby establishing fraudulent intent. 

Next, the court addressed the investor-defendants’ argument that they should be permitted to keep their contractually-guaranteed interest payments for which they asserted they paid reasonably equivalent value.  Under TUFTA, a transfer is not voidable against a person who took in good faith and for reasonably equivalent value.  Value is given if, in exchange for the transfer, an antecedent debt is secured or satisfied.  Here, the CDs issued by Stanford were void and unenforceable, invalidating any contractual claim to interest; thus, the court concluded the investors failed to provide any value for the interest payments that they received.  The court explained that, in the context of a Ponzi scheme such as Stanford, each payment of interest to an investor (made possible by a later investor’s deposit) decreases the net worth of the entity operating the scheme.  Accordingly, the district court’s grant of partial summary judgment in favor of the Receiver on its TUFTA claims was affirmed.  Notably, the Fifth Circuit agreed with the district court’s conclusion that the investors did give reasonably equivalent value to the extent that they received back their principal because they have actionable claims for fraud and restitution.  Thus, in contrast to the interest payments, the principal payments were payments of an antecedent debt.