Status of Securities and Exchange Commission v. Stanford International Bank et. al

On Feb. 16, 2009, the Securities and Exchange Commission filed a civil complaint against Robert Allen Stanford and three of his companies for allegedly operating an $8 billion fraudulent investment scheme. The three named Stanford companies are Antiguan-based Stanford International Bank, Ltd. (SIB), Houston-based broker dealer Stanford Group Company (SGC), and investment adviser Stanford Capital Management, LLC (SCM). The SEC also named James M. Davis, SIB`s Chief Financial Officer, and Laura Pendergest-Holt, Chief Investment Officer at SIB, in the enforcement action.

The SEC`s complaint, filed in federal court in Dallas, claims that the defendants sold approximately $8 billion of ``certificates of deposit`` to investors by promising implausible and unsubstantiated returns. According to the SEC, SIB made at least four material misrepresentations in connection with the sale of its securities: (i) that it re-invests client funds in primarily ``liquid`` financial instruments; (ii) that it monitors the investments with a team of 20-plus analysts; (iii) that the financial instruments are subject to yearly audits by Antiguan regulators; and (iv) that its investment portfolio is not exposed to the fraud perpetrated by Bernard Madoff. The SEC also alleges that the defendants induced clients to invest in a mutual fund wrap program by using materially false historical performance data, which generated fees for SGC (and ultimately Stanford personally) in excess of $25 million. The SEC seeks, among other things, a permanent injunction, disgorgement of ill-gotten gains plus pre-judgment interest, and civil monetary penalties.

The same day that the SEC’s complaint was filed, Judge Reed O`Connor, a federal judge in Dallas, appointed Ralph S. Janvey, Esq. as receiver of the defendants` assets and issued a temporary restraining order that prohibits the defendants from violating certain antifraud provisions of the federal securities law, the Advisers Act and the Investment Company Act. In addition, Judge O`Connor ordered that any action against any of the defendants or the entities relating to the subject matter of the SEC`s complaint must be brought in the United States District Court for the Northern District of Texas, Dallas Division.

The court`s temporary restraining order potentially impacts many entities that did business with the Stanford entities as well as those numerous individuals and entities that were potentially harmed.

Individuals and Entities Impacted by the Stanford Litigation

  1. nvestors

Investors who purchased CD`s or other financial instruments from Stanford and his related entities may have claims against Stanford and his companies for, among other things, securities violations, and common law and statutory fraud. At least three such class action complaints have already been filed.

Investors may also bring individual and class action lawsuits against the individuals and entities that convinced them to invest monies with Stanford. Accounting firms, auditors and lawyers could also be sued. Similar complaints have been filed in connection with the Bernard Madoff scandal. The crux of the plaintiffs` claims in these cases is that the referring entities abdicated their responsibilities by failing to perform sufficient due diligence that would have revealed irregularities in the investments, operations and financial reporting of the defendants.

Judge O`Connor’s order also requires that the receiver, Mr. Janvey, institute actions to recover assets from persons that received distributions from the Stanford companies. Thus, individuals and entities that received disbursements from the Stanford Companies may be required to defend suits against the receiver. Again, though, Judge O`Connor`s order requires that these actions must be filed in the U.S. District Court for the Northern District of Texas, Dallas Division. Furthermore, the receiver may pursue a course of action that runs contrary to the interests of those who invested or are somehow involved with the Stanford entities. It is important, therefore, that investors have privately retained counsel to advocate their interests to the receiver and the court.

  1. Creditors

Other individuals and entities affected include the creditors of Stanford and the other named defendants. Under the terms of Judge O`Connor’s order, the creditors of Stanford and the other named defendants, such as vendors that provide services to the Stanford entities, are prohibited from taking any action, without court approval, to obtain possession of the defendants` assets or enforce any lien against the defendants` property.

  1. Banks and Investment Companies

The court`s order provides that banks, savings and loan associations, broker-dealers, investment companies, and other financial institutions that hold accounts in the name of Stanford or the other named defendants are prohibited from making any disbursement of funds from such an account. Likewise, these entities are required to preserve all relevant documents and to cooperate with the receiver, Mr. Janvey, by promptly responding to his requests for information pertaining to the financial transactions and assets of the defendants.

Next Course of Action for Those Impacted by the Stanford Litigation

Going forward, individuals and entities that have connections to R. Allen Stanford or any of his companies should take prompt action to investigate their exposure to Stanford`s investment scheme. Preservation of records, including e-mails, word processing documents, spreadsheets, databases, calendars, telephone logs, contact manager information, internet usage files and network access information, is critical and should be done immediately. Those affected should also examine their insurance policies to determine whether their policies cover potential claims or whether their insurance carriers require notice of potential claims. Finally, because Stanford has affiliated entities all over the world, any non U.S. person or entity affected by this scandal should carefully evaluate all jurisdictional issues to avoid limiting their available remedies.