Fifth Circuit Affirms Order Denying Arbitration in Ponzi Scheme Case
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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, (5th 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.
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