The legal woes of R. Allen Stanford, who was found guilty on 13 of 14 charges of fraud by a Houston jury last week, may be over.
But for more than 300 former Stanford Financial Group financial advisers, a legal quagmire awaits.
The advisers are fighting a lawsuit filed in 2009 by Stanford Financial's court-appointed receiver seeking a claw-back of commissions and recruitment bonuses worth an alleged $143 million.
Mr. Stanford was convicted of siphoning off $7 billion in investor funds through fraudulent CDs issued by the firm's Antigua-based bank.
The guilty verdict is a “significant milestone” for other Stanford-related cases, said Kevin Sadler, a partner at Baker Botts LLP, an attorney for the receiver.
That's because some of the firm's former advisers and their attorneys “to this day insist there was no Ponzi scheme,” Mr. Sadler said. They argue “that [Stanford Financial] was a legitimate business that just collapsed. So the conviction makes it less likely, if not impossible, to indulge in that fantasy.”
The claw-back suit has been on hold while the receiver and lawyers for the brokers have fought over whether the receiver must pursue each broker individually in arbitration.
A decision on that question is pending in the 5th U.S. Circuit Court of Appeals in New Orleans.
Mr. Sadler expects the appeals court to rule in his favor within the next two months, based on a prior ruling in his favor.
Win in hand, he expects to seek a summary judgment against the brokers as a group.
“If you make money selling what a Ponzi scheme has to sell, you have to give the money back,” Mr. Sadler said.
While the claw-back battle plays out, $25 million in assets belonging to about 100 of the former Stanford employees remains frozen.
“I've got clients with 401(k)s from prior employers [that had been rolled over into a Stanford plan] frozen,” said Jason Graham, a partner at Graham and Penman LLP, who represents eight of the brokers.
Lawyers for the brokers said that an adverse decision from the appeals court would be taken to a higher court.
“Our position all along has been that you can't lump all these financial advisers together,” Mr. Graham said, arguing that each adviser should have the right to an arbitration hearing.
The advisers claim that much of their business was legitimate and untouched by the fraud.
One former adviser, Chuck Vollmer, moved his team with about 1,200 customers and about $250 million in assets from UBS Financial Services Inc. to Stanford in 2004.
“When it blew up, we had about $500 million [at Stanford],” he said. “Of that, about 8% was in the bank [certificates of deposit], which represented about 9% to 10% of our revenue.”
Prosecutors alleged that Mr. Stanford siphoned off investor funds through fraudulent CDs issued by the firm's Antigua-based bank.
The receiver now is pursuing Mr. Vollmer for the commissions that he earned at Stanford, some of the upfront bonus money he got when he joined the company, and incentive stock Mr. Vollmer said he never received.
Mr. Vollmer, a resident of Florida, left the business in 2009 after state regulators refused to transfer his license. He is now trying to start a beverage distribution business.
“I don't think we're suing to recover any commissions from the [legitimate] sale of a hundred shares of Exxon [Mobil Corp.],” Mr. Sadler said. “We've traced specific amounts [advisers were] paid to sell CDs, their commissions ... bonuses and, in some cases, the front-end [recruitment] loans that were an enticement to get someone to join and convert their clients to the CD product.”
Mr. Graham thinks that targeting advisers is unfair.
“We've never understood the difference between the [advisers'] pay versus what the cleaning service or the receptionist was paid,” he said. “Why go after just the financial advisers?”
“If you received payment from a Ponzi, as a matter of law, that's a fraudulent transfer,” Mr. Sadler said. “To the extent you gave something of reasonable value in return, and did it in good faith, you can keep the reasonable value.”
So a janitor who got a “going rate — and had no idea what was going on — was not sued,” Mr. Sadler said. “Our view is that some of these FAs did know [about the fraud] or were willfully blind to the red flags because they were making so much money.”
In court filings, the Stanford receiver has said that advisers should have questioned why Stanford's bank was based in Antigua, why the CD returns were so high and stable, and why the commissions were far higher than amounts paid on other CDs.
That reasoning grates on advisers, who say they are being held to a higher due-diligence standard than Stanford's regulators.
Securities and Exchange Commission staff suspected as early as 1997 that Stanford was operating a Ponzi scheme, but couldn't get commission enforcers to take action, according to a report from the SEC's inspector general.
Mr. Vollmer said that he personally had about $100,000 in the Stanford CDs, and his family members more than $500,000.
“What did I know?” he asked.
[email protected]
