WEB EXCLUSIVE: The Stanford saga





Tim Prudhoe TEP summarises the key events in the liquidation of Stanford International Bank (SIB)

On 6 March 2012, financier and cricket mogul Allen Stanford was found guilty of 13 out of 14 charges against him arising from his involvement in a USD7 billion Ponzi scheme. His conviction followed a six-week-long jury trial in Houston (US v Stanford 09cr342 US District Court, Southern District of Texas).  His sentencing is scheduled to occur on 14 June 2012, at which victim impact statements representative of the many investors will be heard.

It is a cruel irony indeed that, in a postMadoff world, a scheme as large as USD7 billion is far less newsworthy than it once would have been. However, the Stanford saga has shone a light on attitudes from and within the USA regarding cross-border insolvency with particular focus on international financial centres (the so-called offshore world).

The framework within the US for recognition of cross-border insolvency (based on the UNCITRAL Model Law) came into force in 2005 and has been successfully invoked many times, in particular since the financial crisis of 2008 (Fairfield Sentry – BVI and New York, Millennium Global Emerging Credit Master Fund – Bermuda and New York). That said, in respect of the efforts made in the North District Court of Texas (by way of receivership, rather than liquidation) it is highly questionable as to whether the necessary definition of ‘collective proceeding’ is even satisfied, by which primacy recognition of a foreign insolvency proceeding is granted.


A race to court

In what amounted to a race to court, the Antigua and Barbuda joint liquidators won: beating the Texas Federal Court appointed US receiver and thereby avoiding a determination on the merits of the ‘collective proceeding’ issue in respect of the US receivership. Hard on the heels of the Order of the Eastern Caribbean Supreme Court (Antigua and Barbuda), the Antiguan joint liquidators obtained recognition in the English Courts (subsequently upheld on appeal) as the primary action (foreign main proceeding) and by which gaining control of assets held in the name of Stanford International Bank in that jurisdiction. The Antiguan joint liquidators were similarly recognised in Switzerland and limited permission was later granted to them in Quebec, Canada, for the purposes of being ‘knowing assistance’ claims as against a bank there (Toronto Dominion).


A bit of background

Of the many steps in an increasingly complicated procedural background to the insolvency, the following are of particular note:

·         16 February 2009, the US SEC applied successfully to a US District Court in Texas for an order appointing a US receiver (the US receiver) over the assets of SIB and Mr Stanford.

·         15 April 2009, the Court of Antigua granted an order for the liquidation of SIB and for the appointment of Mr Wastell and Mr Hamilton-Smith as its joint liquidators. This order meant that all of the assets of SIB wherever situated were vested in the Antiguan liquidators.

·         22 April 2009, the Antiguan liquidators applied to the High Court in England under Article 15 of the Model Law for an order for recognition of the Antiguan liquidation of SIB as the ‘foreign main proceeding’

·         8 May 2009, the US receiver also applied to the English High Court for recognition of the US receivership of SIB.

·         June 2009, the competing recognition applications of the Antiguan liquidators and the US receiver were heard by Mr Justice Lewison. Mr Justice Lewison accepted the application of the Antiguan liquidators and dismissed that of the US receiver.

·         25 February 2010, the English Court of Appeal[1] held that the US receiver was not a ‘foreign proceeding’ within the meaning of that expression as defined in Article 2(1) of the Model Law (and that the Antiguan liquidation was a foreign proceeding). It held that SIB’s centre of main interest, or ‘COMI’ was Antigua).

·         12 May 2011, the High Court of Justice for Antigua and Barbuda appointed Messrs ‘ Marcus Wide and Hugh Dickson of Grant Thornton as the new liquidators for SIB.

·         5 December 2011, the Antiguan Liquidators applied to the US District Court seeking recognition of a foreign main proceeding. The decision is still pending.

·         10 April 2012 the same Texas judge hearing the recognition application by the Antiguan liquidator issues a request for evidence (‘a Letter of Request’) to the English Court, the basis for which is to completely ignore the current primacy of the Antiguan liquidation.


SIB assets

It is believed that SIB has around USD8 billion in assets located all over the world, with 92 per cent of these assets yet to be traced. This sum is made up of 30,000 depositors in 100 different countries. 15.74 per cent of these depositors are US nationals, representing 22.21 per cent of the actual investments. Depositors from Latin America represented 71.17 per cent of total depositors and 58.56 per cent of investments. These figures speak for themselves on this issue of whether it is accurate to characterise dealing with victims of the scheme as necessarily US-centric.


US receivership v Antiguan claims process

From the (extensive) court filings in the pending Texas recognition application by the Antiguan liquidator as the ‘foreign main proceedings’, the US receivership compares badly to the Antiguan claims process:

·         Estimates as to the cost of claims processing within the US receivership are put at USD3.85 million

·         Estimates as to equivalent Antiguan costs (on a process predicted to be completed by September 2012) as USD0.95 million

·         Recoveries thus far by the US receiver have been USD217 million (of which USD63 million was in cash anyway) as against fees and expenses of as much as USD112 million.

·         Of the USD112 million fees and expenses, USD50 million is said to relate to ‘winding-down costs’, where claw-back claim recoveries total only USD12 million.

·         Unlike Antigua, the US receivership has no statutory framework for the claims processing.

In addition, the US process is far more vulnerable to the effect of the USD330 million forfeiture Order in favour of the US Department of Justice (DoJ) made in early March at the conclusion of the recent criminal trial (and conviction) of Allen Stanford in that:

·         Pending the inevitable appeal by Allen Stanford that money cannot be distributed to victims of the fraud.

·         There is neither oversight nor transparency in respect of subsequent distributions by the DoJ following forfeiture. For example, in 2009 of the USD1.4 billion in total recovered by the DoJ that year, as little as USD152 million/10.9 per cent was actually distributed to victims.

While all concerned agree in the abstract as to the need to avoid the further cost and delay caused by the ongoing battle for primacy as the main insolvency proceedings, there is little sign of agreement on a workable way of implementing that in advance of a decision on the pending Chapter 15 application by the Antiguan joint liquidators in Texas. An interesting recent move in the ongoing ‘hearts and minds’ campaign by the Antiguan joint liquidator has been the ‘open offer’ (as also filed in the Texas recognition proceedings) to the effect that:

•       There be an immediate initial interim distribution to creditors (99.92 per cent of which are depositors).

•       Release of approx. USD80 million (UK), USD20 million (Canada) USD208 million (Switzerland) that would be deemed forfeit to the DoJ, but released to the Antigua joint liquidators for agreed distribution.

•       Initial distribution of 80 per cent of the cash balance, 20 per cent retained to cover liquidation costs.

•       Ring-fenced against payment to the Antiguan government (a constant theme of the US receiver).

•       No payment of contingency fees and DoJ to have a right of audit

As of late May 2012, this offer has not been accepted by the US receiver and no counter-offer has been made. The saga will continue, and the Texas court’s decision on the pending recognition application by the Antiguan joint liquidators will remain key. Latest moves in the Texas proceedings including efforts by the US receiver to avoid the problems inherent with their Letter of Request to the English court by seeking relief from the Texas court directly against the subjects of the Letter of Request (namely HSBC bank) in both proceedings related to the Chapter 15 application as well as in other, separate, proceedings in which at least some of the same documentation has already been disclosed by HSBC (Rotstain v Trustmark National Bank 3:09-CV-2384).


Awaiting a decision

Given that this direct application by the US receiver for banking documentation is based on the alleged lack of cooperation by the Antiguan joint liquidators, simply by virtue of the fact of their having even made the Chapter 15 recognition application at all, it is a further illustration of the US receiver’s attitude towards the notion of anyone outside of the US being left in charge of the claims and distribution process. The long-awaited decision on the Chapter 15 application for recognition will be key as to the future direction of this highly controversial cross-border insolvency.

[1] Re Stanford International Bank Ltd (In Liquidation) [2010] EWCA Civ 137

This is a summary of a lecture given at the STEP Caribbean Conference 2012 in the Cayman Islands in conjunction with the Joint Liquidator of SIB, Marcus Wide.

Tim Prudhoe TEP is a barrister and partner with Kobre & Kim LLP, an international litigation and arbitration boutique with offices in New York, London, Hong Kong, Miami, British Virgin Islands and Washington DC. Tim, who works out of both the British Virgin Islands and London offices, specialises in multi-jurisdictional disputes including contentious insolvency, onshore and offshore trusts, asset tracing and international judgment enforcement related matters. He is a contributor to Gore-Browne on Companies on a variety of topics in relation to his practice and a regular conference speaker both in England and offshore.



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