Close

Are you in compliance?

Don't miss out! Sign up today for our weekly newsletters and stay abreast of important GRC-related information and news.

Stanford Conviction Sets a Series of Legal Activity in Motion

Bruce Carton | September 18, 2012

When cases of major corporate fraud are exposed, the criminal and regulatory investigations that follow typically go on for years. When and if there is a criminal trial of the CEO, that trial often marks the end of the proceedings and provides closure. The big fish has been landed, now it's time to go home.

Not so in the Allen Stanford Ponzi scheme case; Stanford's conviction set a series of legal actions in motion, some of which are highly unusual. Only now that Stanford has been convicted and is behind bars are many long-frozen prosecutions, guilty pleas and a variety of important civil actions finally able to move forward.

In early 2009, details began to emerge of the multi-billion dollar Ponzi scheme that Allen Stanford and some of his colleagues at Stanford Financial allegedly carried out, and Stanford himself was arrested in June 2009. In March 2012, a federal jury in Texas found Stanford guilty on thirteen counts, including charges of conspiracy, mail and wire fraud, and obstructing a Securities and Exchange Commission investigation. He was later sentenced to a staggering 110 years in prison and hit with a personal money judgment of $5.9 billion. Stanford's conviction seemed to offer a conclusion to the matter, but a review of the many developments now occurring in the Stanford case indicates that the legal proceedings are hardly drawing to a close. The conviction of Allen Stanford was only a triggering event in many ways, and critical unresolved issues are just beginning to be sorted out.

The delayed proceedings include notable criminal prosecutions. In June 2010, co-defendants Laura Pendergest-Holt, Stanford's former chief investment officer, and former Stanford accounting executives Mark Kuhrt and Gilbert Lopez argued successfully that their trials should be held separately from that of Allen Stanford so that the “circus-like” atmosphere would not prejudice their rights to a fair trial. The court also agreed to delay the trial in their cases until after Stanford's trial was concluded. While prosecutors navigated a seemingly endless series of bizarre delays as they tried to get Allen Stanford's criminal trial started (Stanford somehow managing to become addicted to an anti-anxiety drug while in federal custody; claimed he had developed total amnesia as the result of a jail fight; repeatedly attempting to fire all of his lawyers; and much more), all of these co-defendants remained free on bond.

These criminal prosecutions are finally moving again on the docket.  On June 21, 2012, Pendergest-Holt changed her initial “not guilty” plea to guilty of obstructing an SEC investigation into the activities of Stanford International Bank. Pendergest-Holt admitted that she agreed to testify before the SEC despite the fact that “she was incapable of testifying about the vast majority” of that firm's portfolio. She admitted that her sworn SEC testimony was a “stall tactic” that she engaged in, knowing that it would impede the SEC's investigation and help the firm continue operating. On September 13, the court accepted Pendergast-Holt's plea agreement and sentenced her to 36 months in prison.

 Prosecutors charged the remaining defendants, Kuhrt and Lopez, in July in a superseding indictment with one count of conspiracy to commit wire fraud and ten counts of wire fraud. The criminal trials of Lopez and Kuhrt are now scheduled to begin in October.

On another important front, the Allen Stanford jury's finding that the $330 million discovered in various Stanford-related financial accounts must be forfeited has fueled a tricky international dispute. The U.S. Department of Justice had requested that these funds—located in Canada, the United Kingdom, and Switzerland—be frozen pending the Stanford trial. Following Stanford's conviction and the jury's verdict in favor of forfeiture, many Stanford victims believed that this money—the largest amount yet recovered—would be returned to them. While this may have been the Justice Department's intention, a new legal challenge filed by competing “joint liquidators” appointed by an Antiguan court is now standing in the way.

While Allen Stanford has finally been convicted and has begun serving his 110-year sentence, efforts to bring others to justice and to return money to the victims of the fraud are in many ways just getting started.

In May 2011, the Eastern Caribbean High Court at Antigua appointed accountants Marcus Wide and Hugh Dickson of Grant Thornton as joint liquidators of Antigua-based Stanford International Bank.  The joint liquidators assert that the $330 million in frozen funds should be released to them, not to the Justice Department, and have filed lawsuits in all of the countries involved to prevent the release of the funds to anyone but them. Both sides claim that allowing the other to gain control of the frozen funds is a mistake. The Official Stanford Investor Committee, which was appointed by a U.S. federal court, claims that the joint liquidators intend to retain as much as $100 million of the money to fund other Stanford-related lawsuits and the development of Antiguan real estate owned by various Stanford entities.

The joint liquidators, on the other hand, claim that they will be faster, cheaper, and fairer at collecting and distributing money to victims than the U.S. court-appointed receiver, who earlier this year was criticized for spending roughly 50 cents for every dollar collected. On July 31, the U.S. court-appointed receiver won a key legal ruling when a U.S. court declined to recognize the Antiguan proceeding as a “foreign main” proceeding under the U.S. bankruptcy laws. Such recognition would have helped the joint liquidators gain control of the Stanford assets—including the $330 million. The joint liquidators have stated that they are likely to appeal the ruling, however, so no distribution of the $330 million appears imminent.

The SEC has also indicated it is not done initiating cases against those involved in the case. On August 31, the SEC filed an administrative proceeding against four former executives of Stanford Group Co., Stanford's Houston-based brokerage firm, for their alleged role in the fraud. The SEC alleged that the executives—Jay Comeaux, Daniel Bogar, Bernerd Young, and Jason Green—mischaracterized Stanford's certificate of deposit program as safe “when in fact it was a secret trading program known only to a select few individuals.” Comeaux settled the claims against him without admitting or denying the allegations and accepted a bar from associating with a broker-dealer or investment adviser. Bogar, Young, and Green are contesting the SEC's claims.

The SEC is also taking unprecedented action in a high-stakes dispute with the Securities Investor Protection Corp. over whether investors who purchased Stanford CDs through the U.S.-based Stanford Group Co. broker-dealer are protected under the Securities Investor Protection Corp. In 2011, the SIPC concluded that there was no basis for it to initiate a proceeding to protect customer property under the Securities Investor Protection Act because the Stanford CDs at issue came from the Antigua-based SIB. The SEC reviewed the issue and found, to the contrary, that individuals who invested money through SGC were entitled to the protections of the SIPC. The SEC therefore directed the SIPC to initiate a court proceeding under SIPA to liquidate SGC, which would allow investors with accounts at SGC to file claims with a trustee selected by the SIPC.

The SIPC refused to comply, however, which led the SEC to file a lawsuit against it in December 2011 seeking to force the SIPC to act. On July 3, U.S. District Court Judge Robert Wilkins sided with the SIPC. The court ruled that "the SEC had failed to meet its burden in proving that the victims of the Ponzi scheme constitute 'victims' eligible for compensation by the Securities Investor Protection Corp."  The SEC said it will appeal the decision. The SEC's lawsuit is reportedly the first legal action the agency has ever taken against the SIPC since the fund was established in 1970.

Another rare proceeding stemming from the Stanford case is a negligence suit filed against the SEC by a group of Stanford victims. In September a federal court in Florida ruled that a case against the SEC could go forward—a rare and perhaps unprecedented victory in this type of case against the government. The case has gone further than four similar suits brought by victims of the Madoff fraud. The Stanford plaintiffs allege that the SEC "was negligent when, after concluding that Stanford's company had been operating as a Ponzi scheme, it failed to notify the Securities Investor Protection Corporation about Stanford's company's illicit activities."  In the Madoff cases, courts consistently ruled that there were no allegations that the SEC violated any "mandatory obligations." The SEC may now be forced to reveal more information about its investigation of the Stanford fraud than it has in the past.

So, while Allen Stanford has finally been convicted and has begun serving his 110-year sentence, efforts to bring others to justice and to return money to the victims of the fraud are in many ways just getting started.