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5th Circ. Again Backs $133M Stanford Ponzi Scheme Deals

The Fifth Circuit has stood by its decision to uphold receiver settlements resolving Stanford Ponzi scheme-related claims against two insurance brokers for a combined $133 million, a ruling that objectors argued contradicted an earlier rejection of a $65 million deal with a group of insurance underwriters.

In opinions issued Thursday, a three-judge panel of the appeals court reached the same conclusion as it did in July to affirm the approvals of the two global settlements, which require Bowen Miclette & Britt Inc. and Willis to pay $12.85 million and $120 million, respectively, for distribution by the court-appointed receiver pursuing asset recovery for victims of R. Allen Stanford's $7 billion Ponzi scheme.

The panel's move to revisit its ruling comes after investor holdouts petitioned in August for a rehearing of their appeals, which challenge the settlements' accompanying "bar orders" that block further Stanford-related litigation against BMB and Willis.

A similar bar order included in a $65 million global settlement ending Stanford-related litigation against Lloyd's of London and other underwriters had led the Fifth Circuit to vacate that deal in June, and the objectors to the BMB and Willis settlements pointed to this disparate outcome to argue that a rehearing was necessary to square the "contradictory holding" issued by their panel.

But while the panel said Thursday it had decided to rehear the case and was swapping in a revised set of opinions, the result didn't change as the majority doubled down on its position that the bar orders "fall well within the broad jurisdiction of the district court to protect the [Stanford] receivership."

"Zacarias and Lloyd's do not conflict," U.S. Circuit Judge Patrick E. Higginbotham wrote in the substitute majority opinion, referring to the July and June decisions, respectively. "Each responded to distinct, critical differences in fact."

Among other differences cited by Judge Higginbotham, the underwriters in the Lloyd's decision weren't accused of having participated in the Stanford Ponzi scheme, whereas BMB and Willis were. Many of the Lloyd's objectors were also former Stanford employees suing after the underwriters denied claims for coverage under old indemnity policies issued to Stanford companies, according to Judge Higginbotham.

The Lloyd's court, therefore, concluded that some of their claims "could not properly be reached by the bar orders at all" because their injuries weren't tied to the perpetuation of the fraud scheme, giving rise to claims that were "independent of the receiver's claims and belonged only to [them]," Judge Higginbotham said.

Meanwhile, some of the other Lloyd's objectors were aggrieved investors whose state-law claims the court deemed to be essentially "a redundant claim on receivership assets" and upheld the bar order as to them, Judge Higginbotham added.

"Once these facts are understood, the compatibility of the opinions is plain, for where these cases addressed analogous claims, they reached the same conclusion for the same reasons," Judge Higginbotham wrote. "Both affirm the receivership court's power to bar investors' claims for injuries they suffered as a direct result of the Ponzi scheme. And we address only investors."

In a revised dissent, U.S. Circuit Judge Don R. Willett maintained his view that the BMB and Willis settlement objectors' claims are outside the reach of the Texas federal court that approved the deals.

"For better or worse, the objectors' claims are distinct from the receiver's, meaning the district court lacked jurisdiction to adjudicate them, or to enjoin them," Judge Willett wrote. "I would thus vacate the bar orders. As the majority does otherwise, I respectfully dissent."

The BMB and Willis settlements arise out of the sprawling $7 billion fraud scheme orchestrated by Stanford that unraveled after the financial crisis of 2008.

A U.S. Securities and Exchange Commission investigation revealed Stanford had been selling billions in fraudulent certificates of deposit issued by Antigua-based Stanford International Bank Ltd. In 2012, he was sentenced to 110 years in prison after a jury convicted him of defrauding approximately 30,000 investors.

BMB and Willis allegedly helped Stanford buy insurance policies that were then hyped up to investors, and the brokers were also alleged to have vouched for the bank in letters that were used in investor marketing.

When the scheme collapsed, the $7 billion in deposits was actually protected by just $50 million in insurance coverage, according to Thursday's decision. After the SEC filed suit against Stanford, the bank and other related entities in 2009, Ralph Janvey was appointed by the court to serve as receiver over the Stanford companies and begin asset recovery efforts.

Baker Botts LLP partner Kevin Sadler, who is representing the receiver, said in a statement to Law360 on Friday that his client is "pleased that the panel once again affirmed the settlement and the receiver's discretion to pursue such recoveries for the victims."

"This is a very significant recovery for the Stanford victims," Sadler said.

Jonathan Polkes, who is a Weil Gotshal & Manges LLP partner and representing Willis, expressed satisfaction with Thursday's outcome.

"We agree with the court that the objectors rode the receiver train to the end and then tried to hold up the settlement," Polkes said in a Friday email to Law360. "We are gratified the court saw it that way and affirmed the district court."

Bradley W. Foster, Hunton Andrews Kurth LLP partner and counsel for BMB, said his side is "pleased that the Fifth Circuit saw though the objectors’ arguments."

"As Judge Higginbotham noted, the appellants tried to blow up a carefully negotiated settlement because they wanted 'special treatment,'" Foster said in an email to Law360. "Their efforts were unfair to thousands of other investors, and the court was right to reject them."

Pulman Cappuccio & Pullen LLP founder Randy Pulman, one of the attorneys for the objector appellants, told Law360 that his side disagrees with the outcome of Thursday's split opinion.

"The majority opinion cannot be reconciled with the diametrically opposed holding in the Lloyd's opinion handed down a few months ago from a different panel of the Fifth Circuit on the issue of whether an equity receiver can bar claims of creditors against third parties," Pulman said in a Friday email. "The effect of the existing split in the Fifth Circuit is that equity receivers have broader [perhaps unbridled] powers to bar claims against third parties that a bankruptcy trustee does not."

"We look forward to review by the [U.S. Supreme Court]," Pulman added.

U.S. Circuit Judges Patrick E. Higginbotham, Don R. Willett and James E. Graves Jr. sat on the panel for the Fifth Circuit.

The investor objector appellants are represented by Colson Hicks Eidson, Homer & Bonner PA, Pulman Cappuccio & Pullen LLP and Stanley Law PC.

BMB is represented by Hunton Andrews Kurth LLP.

Willis is represented by Weil Gotshal & Manges LLP.

Janvey is represented by Baker Botts LLP, Clark Hill Strasburger and Castillo Snyder PC.

The case is Carlos Tisminesky et al. v. Willis Group Holdings Public et al., case number 17-11129, in the U.S. Court of Appeals for the Fifth Circuit.

via Law360

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