Fifth Circuit Affirms Order Denying Arbitration in Ponzi Scheme Case

The United States Court of Appeals for the Fifth Circuit has affirmed a district court’s order denying a motion to compel arbitration that was filed by a group of former Ponzi scheme employees.  In Janvey v. Alguire, et al., No. 14-10857, Cons. w/Nos. 14-10945, 14-11014, 14-11093, (5^th Cir. January 31, 2017), R. Allen Stanford created a massive Ponzi scheme using a large network of interconnected companies and a bank that were collectively known as the Stanford Group.  Over the course of 10 years, the Stanford Group apparently brought in more than $7 billion in investments.

In 2009, the Securities and Exchange Commission brought suit against the Stanford Group and froze all of its assets.  Stanford was later imprisoned after pleading guilty to numerous federal charges related to the Ponzi scheme. In addition, a Receiver was appointed by the Northern District of Texas to unwind the Ponzi scheme and preserve and recover company assets that were conveyed through fraudulent transactions.

The Receiver filed suit against several former Stanford Group employees in an effort to recover about $215 million in allegedly inflated salary payments, bonuses, commissions, and forgiven loans.  In response to the Receiver’s lawsuit, the employees filed a motion to compel the dispute to arbitration based on agreements the workers signed with various companies that were part of the Stanford Group.  The district court denied the employees’ motion because the Receiver’s claims were brought on behalf of third-party creditors who were not a signatory to the contracts between the workers and the Stanford Group.

Meanwhile, the Fifth Circuit held in a related case that the Receiver had “standing to assert only the claims of the entities in receivership, and not the claims of the entities’ investor-creditors.”  Janvey v. Democratic Senatorial Campaign Committee, Inc. (DSCC II), 712 F.3d 185 (5th Cir. 2013). As a result, the appellate court also vacated the Northern District of Texas’ order denying the employees’ motion to compel arbitration and remanded the case.

On remand, the district court once again denied the workers’ motion to compel arbitration.  According to the court, the Receiver was obligated “to sue on behalf of the Company, which was party to the arbitration agreements,” he permissibly “rejected the arbitration agreements,” and “arbitration of the Receiver’s claims would conflict with the central purposes and objectives of the federal equity receivership statutory scheme.”  The employees then filed an interlocutory appeal with the nation’s Fifth Circuit.

First, the Court of Appeals addressed the Receiver’s claim “that he is free to bring his TUFTA claims on behalf of any of the Stanford entities and that, by bringing the claims on behalf of the Bank, which was not a signatory to the arbitration agreements (except for the agreement with Giusti), he is not bound by the arbitration agreements.”  The court stated:

If the corporations retain identities distinct from Stanford himself, as “separate legal entities with rights and duties,” it logically follows that they are distinct from one another. Scholes, 56 F.3d at 754. Now that Stanford no longer controls the Bank and the Company for the benefit of an integrated criminal scheme, the Bank and the Company are separate actors. The Receiver, appointed by the court to represent all of the Stanford entities, may bring his claim on behalf of whichever of the entities he chooses, provided that the entity has a claim against the defendant in question.

The court then dismissed the employees’ alter ego, equitable estoppel, and third-party beneficiary arguments before concluding:

Because the Receiver may sue on behalf of any of the Stanford entities that has a claim against the defendants, because he has chosen to sue on behalf of the Bank, which has not consented to arbitrate claims against any of the defendants, except Giusti, and because none of the equitable doctrines urged by the defendants applies, the Receiver cannot be compelled to arbitrate his claims against these defendants.

We also conclude, though on different grounds, that the Receiver cannot be compelled to arbitrate its claims against Giusti, who did enter into an agreement to arbitrate with the Bank. A party who has entered into an agreement to arbitrate must insist on this right, lest it be waived. “Under this circuit’s precedent, a party waives its right to arbitrate if it (1) substantially invokes the judicial process and (2) thereby causes detriment or prejudice to the other party.” Al Rushaid v. Nat’l Oilwell Varco, Inc., 757 F.3d 416, 421 (5th Cir. 2014) (internal quotation marks omitted). While waiver should not be inferred lightly, we conclude that Giusti’s conduct in this case clears the waiver threshold.

Ultimately, the Fifth Circuit Court of Appeals affirmed the district court’s order denying the former Stanford Group employees’ motion to compel arbitration.

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