SCOTUS Asked to Consider Order Denying Arbitration in Texas Ponzi Scheme Case

Last week, a group of former Ponzi scheme financial advisers asked the United States Supreme Court to overturn the Fifth Circuit’s decision affirming a lower court’s order denying their motion to compel arbitration.  The former Stanford Group employees argue in their petition for certiorari that the Fifth Circuit’s holding created a circuit split that should be resolved by the nation’s highest court.  In addition, the former financial advisers reportedly claim their request for arbitration should be granted based on their written employment contracts as well as under the Financial Industry Regulatory Authority’s arbitration rules.

More background on the case is available in another Disputing blog post:

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.

Earlier this year, a Fifth Circuit Court of Appeals panel ultimately affirmed the lower court’s order.

Interestingly, the appellate court declined to consider the Receiver’s position that the arbitration agreements at issue were unenforceable due to fraud and other policy arguments citing the “the absence of specific direction from the Supreme Court.”  The court stated:

The Receiver also argues that these particular arbitration agreements are additionally unenforceable because they were instruments of the fraud inasmuch as the privacy they provided facilitated the fraud and because the Stanford entities were coerced into accepting them by Stanford as part of his Ponzi scheme. As a result, the Receiver argues that, under the logic of DSCC II, the Company cannot be bound to them now that Stanford is removed from the scene unless the Receiver affirmatively assents to them, and that enforcement of the arbitration agreements would give effect to the very fraud the Receiver is charged with unwinding by diminishing his ability to return fraudulently transferred assets to the creditors. The Receiver makes a strong argument that if we hold that he is bound by the terms of the contracts involved in Stanford’s Ponzi scheme, there would be no basis for recovering the funds that were fraudulently transferred to the scheme’s net winners pursuant to their employment contracts. We need not reach this issue as we have already determined, on other grounds, that the Receiver cannot be compelled to arbitrate its claims against any of the defendants.

Nor do we reach the Receiver’s similar but broader policy argument that the underlying purpose of the federal equity receivership statutes is at odds with the FAA’s mandate in favor of arbitration. In support of this alternative basis for denying the motions to compel arbitration, the district court raised important concerns about undermining Congress’s goal of consolidating receivership claims before a single court. However, we are wary of endorsing these broad policy arguments in the absence of specific direction from the Supreme Court. Cf., e.g., DIRECTV, Inc. v. Imburgia, 136 S. Ct. 463, 471 (2015) (rejecting interpretation of law that “does not give ‘due regard . . . to the federal policy favoring arbitration’”) (quoting Volt Info. Scis., Inc. v. Bd. of Trustees of Leland Stanford Junior Univ., 489 U.S. 468, 476 (1989)).

It will be interesting to see if the Supreme Court grants the former Ponzi scheme employees’ petition.  Please check back later for future developments in this case!

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