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  • Michael D. Gorman

Stanford - Ponzi Scheme Settlements Versus Private Investors

Richard Stanford bilked his investors for over $132 million in a massive Ponzi scheme. He promised exceedingly high rates on certificates of deposits and used funds collected from subsequent investors to fund his criminal enterprise. His scheme came to a crashing halt with the financial crisis in 2008 – his supply of investors simply evaporated.

The SEC filed various charges against Stanford and his related entities in federal court. The district judge appointed a receiver to assist in locating and distributing assets to defrauded investors. The court–appointed receiver had the sole right and authority to bring lawsuits to recover monies on behalf of defrauded investors or other interested parties.

Among those sued by the receiver were Willis and BMB. After lengthy litigation, both Willis and BMB agreed to settle and pay a total of $132 million in exchange for a complete release from the receiver. The release would prevent any future suits against Willis and BMB by any other entities or persons. A group of defrauded investors objected to the settlement. They independently sued Willis and BMB in state court actions– in violation of the court’s receivership order – seeking recovery of additional monies directly from them. The district court approved the receiver’s settlement agreement with Willis and BMB. The group of defrauded investors objected to the settlement and appealed. The Fifth Circuit upheld the lower court’s decision approving the settlement and disallowed the suits filed by the defrauded investors.

The Fifth Circuit held that the defrauded investors’ claims were not, as they contended, “independent and distinct” from the claims the receiver was pursuing. See Zacarias v. Standford International Bank Ltd., No. 17-11073 (5th Cir. July 22, 2019). The harm arose from a singular harm, namely, Stanford’s Ponzi scheme involving one massive fraud operation. Moreover, allowing individual investors to circumvent the receivership’s orderly process of both recovering and distributing recovered assets, invites duplicity of litigation and increases costs, as well as lowers recovery for all parties.

The defrauded investors also objected to the court-approved settlement agreements because they were essentially “de facto class settlements” without certifying a class. However, the Fifth Circuit disagreed, noting that Congress authorizes district courts to appoint receivers and the district court judge decided not to certify a class in this case.

The Fifth Circuit also held that the district court did not abuse its discretion in approving the settlements. The defrauded investors claimed that the settlement approved by the court was premature and they could have recovered more money through their independent lawsuits. The Fifth Circuit held this was speculative at best, and the settlement was the product of much investigation and protracted litigation with BMB and Willis. The potential benefits of additional litigation were outweighed by the risk of the SEC failing to prove all charges filed against BMB and Willis, as well as the costs to all sides of continued litigation.


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