DALLAS, January 10, 2019 – Baker Botts L.L.P., a leading international law firm, announced today that on January 9, the U.S. Court of Appeals for the Fifth Circuit rendered judgment for Baker Botts client Ralph S. Janvey, the court-appointed Receiver of the Stanford International Bank. Stanford propagated the second-largest Ponzi scheme in history by amount (and had the largest number of victims of any Ponzi scheme).
In Janvey v. GMAG, L.L.C. et al., No. 17-11526, the court of appeals reversed a trial court win for the defendants—Gary D. Magness and a series of entities under his control (collectively called “Magness”).
Magness was one of the largest investors in the Stanford Ponzi scheme. In the autumn of 2008, shortly before Stanford’s collapse, Magness obtained a series of “loans” against his Stanford certificates of deposit, through which he was able to secure $88 million from Stanford. As the trial court determined, this exceeded his original investment of $79 million.
The Receiver sued Magness under the Texas Uniform Fraudulent Transfer Act, or “TUFTA,” to recover the $88 million dollars that Stanford transferred to Magness. The trial court granted summary judgment to the Receiver on the Receiver’s claim to recover Magness’s $9 million dollars in profit, and thereafter Magness repaid that sum to the Receiver, together with interest and attorneys’ fees.
The case then proceeded to trial to determine whether Magness would have to return the remaining $79 million. Magness did not dispute at trial that the $79 million in transfers he received from Stanford were fraudulent under TUFTA. He instead asserted the affirmative defense of good faith—that he took that money without knowledge of fraud or insolvency on the part of Stanford. He made that contention to the court even though, almost a decade earlier, he saved approximately $8 million in taxes by telling the IRS that he had been worried about Stanford when he took out the loans.
At trial, the jury found that Magness was on inquiry notice that Stanford was a Ponzi scheme, which the Receiver argued was enough to defeat Magness’s good faith. But the trial court ruled that there was a “futility exception,” under which a defendant is deemed to have taken fraudulent transfers in good faith, even when they were on inquiry notice, if a jury concludes that a hypothetical diligent investigation would have been “futile” in uncovering the Ponzi scheme. The jury concluded that such an investigation would have been futile here. The trial court rejected the Receiver’s argument that TUFTA has no “futility” exception. The Receiver’s contention was that futility has nothing to do with good faith.
But this week’s Fifth Circuit decision adopted the Receiver’s position. “Regardless of the intricate nature of a fraud or scheme,” it held in opinion by Chief Judge Carl Stewart, joined by Judges James L. Dennis and Don R. Willett, “failing to inquire when on inquiry notice does not indicate good faith.” And without good faith, Magness has no basis to keep the fraudulent transfers. The effect of the Court’s judgment is that Magness must disgorge the $79 million in fraudulent transfers. When the case is returned to the trial court, the Receiver will seek an award of prejudgment interest and attorney’s fees, the total value of which may result in a final judgment in excess of $100 million.
“The outcome in the Fifth Circuit is a significant accomplishment for the Receiver in his ongoing effort to return as much as possible of the defrauded amounts to the victims of Stanford’s Ponzi scheme,” said Kevin Sadler, Baker Botts partner and lead counsel representing the Receiver.
The Baker Botts team included:
Kevin Sadler (Partner, Palo Alto) was lead counsel on behalf of the Receiver and was first chair at trial. Evan Young (Partner, Austin) argued the appeal for the Receiver in the Fifth Circuit. Scott Powers (partner, Austin) was the second chair at trial, and other Baker Botts lawyers and staff at trial and on appeal include: Brendan Day (special counsel, Austin); Wade Allison (associate, Austin); Grayson McDaniel (associate, Austin); former associate Ashley Allen Carr (Austin); and Lynne Dodge (litigation specialist, Austin).
The Baker Botts team is available to comment on this significant Fifth Circuit decision. Please contact Sheena Cochran to schedule an interview.
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