Allen Stanford Receiver Sues Tour, IMG, Toms

Bloomberg's Andrew Harris reports on a court-appointed receiver's attempt to recoup from Stanford Financial beneficiaries, including $13 million from the PGA Tour. Thanks to reader James for this:

Ralph Janvey, the receiver, and the court-sanctioned investors’ committee said in a complaint filed today in federal court in Dallas that the PGA Tour received tainted money generated by an alleged $7 billion fraud scheme led by Stanford.

Stanford has repeatedly denied civil and criminal allegations that he sold certificates of deposit through Antigua-based Stanford International Bank Ltd. by misleading speculators about the nature of the CDs and their regulatory oversight.

“PGA did not provide reasonably equivalent value for the transfers of CD proceeds to it and cannot establish that it is a good faith transferee,” Janvey and the committee said in today’s filing.

Toms was sued for $900,000 in CD profits and IMG $10.5 million to recoup sponsorship fees and expenses. 

The tour declined comment. 

For more from the Stanford files, there are past posts here, here and here.

Okay CD experts out there, what went on here?

Comments

[cardinal]

Not an expert, but this is not a CD issue. It's an issue of fraudulent transfer law. State law and the U.S. Bankruptcy Code allow creditors (usually represented by a receiver in state court actions and a bankruptcy trustee in bankruptcy court) to pursue such actions against individuals or entities to whom an debtor transferred property without receiving a reasonably equivalent value in exchange for that property. State laws vary somewhat (but not much), but most are similar to the fraudulent transfer section of the Bankruptcy Code. That section allows a trustee to avoid (i.e., recover) transfers that were actually fraudulent (i.e., the transfer was made with actual intent to hinder, delay or defraud creditors) or constructively fraudulent (intent is irrelevant).

Here, it appears the receiver is going after Toms and the PGAT for constructively fraudulent transfers. (Caveat: I have not read the complaint yet). The elements of a constructive fraud action include (1) a transfer made (2) when a debtor is insolvent (or the transfers resulted in the debtor having unreasonably small capital, etc.) (3) for which the debtor receives less than a reasonably equivalent value. The Bankruptcy Code provides that a transferee who " takes [the transfer for value and in good faith" can retain any interest "to the extent that such transferee . . . gave value in exchange for such transfer or obligation." So the question will be whether PGAT gave Stanford $10.5 million in value. Good question.

[cardinal]

P.S. The Bankruptcy Code will not apply here, but Texas fraudulent transfer law is similar. Even though the receiver filed the action in federal district court, state will govern.

[Jordan]

Geoff:

It's the same thing the Madoff trustee is doing. The "winners"-people who took out more than they put in-have to pay back their "winnings" so that the losers can get something back.

[Ky Laffoon's Ghost]

Was wondering when they would come after Vijay, who was wearing a prominent "Stanford" golf shirt at the end of Sir Allen's reign.

$900,000 in CD profits? Does that even make sense for one wealthy, but not in the Gates Division, individual? Del?

[Old Hornet]

Agree Ky, it's better than Madoff ever promised.

BTW, loved your peer review analogy for PK (bftd). And I'm sure instances like Mann's hockey stick gang at UVA or Wakefield's MMR / Autism study, be they fraudulant or badly conducted, doesn't make it any easier these days.

[Del the Funk]

It was a Ponzi scheme plain and simple. Nothing to do with CD's or any other investment. That was just the terminology used to lure in the cash.

And as Jordan said above, Janvey is doing the same thing as Picard (trustee) is doing in the Madoff case, going after all dollars over and above the initial amount an investor or depositor invested.

What's interesting in the case of Toms is that it appears the lawsuit filed against him isn't for endorsement dollars, but rather investment proceeds. A simple example would be that he deposited $5,000,000 which accumulated $900,000 in of interest income. Then by luck of the timing he took the whole $5,900,000 out before the scheme unraveled -- the receiver wants Toms to pay back the interest. (yes Ky, Stanford was offering returns of close to 20% and not a single person or manager thought "this seems too good to be true")

The NY Met's are seeking a new partner/owner for just this reason, the Wilpon's took out a LOT more money from Madoff than they ever put in and it ain't looking too good for the Wilpon's.

As for the IMG/Vijay Singh situation, looks like they are chasing endorsement income. If the receiver believes this is a valid tactic for getting money returned then Camilo Villegas, Morgan Pressel and the St. Jude Classic should all be expecting the same paperwork to be handed to them in the near term, if it hasn't been already. But I'll be interested to see how this turns out. Seems like advertising is a valid business expense, just like paying rent. Are they going to go around and ask all the landlords to return back rental payments? Seems dubious. (the receiver says "reasonably equivalent value" test is not met, I'm not so sure)

But IMG has to be sweating it. I can't find a full list but I think when both golf and tennis are included the the number of IMG athletes that had a deal with Stanford is large.

One other little tidbit I ran across of interest, apparently super-agent Scott Boras actually had many of his clients heavily, if not fully, invested with Stanford. Saw an article that said Mike Pelfrey had 99% of his cash invested with Stanford.

Be wary and stay conservative people!

[Geoff]

Great stuff, thanks!

[Birdie]

I know that the receiver is suing Toms for the same thing (endorsement money) as he is with everyone else. Toms had no $$ invested in the CDs. I wonder if the receiver will also go after the Golf Channel since Stanford poured a lot of $$ into advertising with GC.According to statements made by Toms, the amount he is being sued for is a lot more than he was actually paid. I'm guessing he won't sue St. Jude's since that is a charity and it would look bad, but i wouldn't put it past him.

[Del the Funk]

Birdie, the St. Jude has a charitable aspect to it but the bulk of Stanford's sponsorship dollars went DIRECTLY to underwrite the purse (which goes directly to the players), and the television buy (in TV advertising for a PGA Tour event the title sponsor the same as the 'anchor tenant' at a big shopping mall, there is a big $$$ number in the contract mandated for buying ads on the network broadcasting that week). Most PGA Tour events are run in a profitable manner (with dozens and dozens of sponsors) and the net proceeds go to the charity, but this is only AFTER other expenses are taken care of.

The link between Stanford and the charity is much less direct than the link between Stanford and the checks players collected after the event was completed.

If the strategy is deemed to be legitimate seems to me that Janvey (the receiver) could possibly go after individual PGA Tour pro's to return any and all dollars won at the event. This would have z-e-r-o to do with the charity.

Again, I think the strategy is dubious but these days who knows!

[cardinal]

The receiver likely will not go after the players who won money at the tournament because such players did not receive the funds directly from Stanford. They were subsequent transferees. The Bankruptcy Code places greater limits on the ability of trustees to pursue subsequent transferees, and I assume that the Texas fraudulent transfer law does as well.

[Birdie]

i thought most of the precedent on these matters where a receiver went after $ like this, had to with attorneys and accountants who had received payment for their services and their services were more directly tied to the fraud. Obviously an accountant who was receiving $ from Stanford wasn't doing his/her job and was "furthuring" the Ponzi scheme. That seems like a legitimate claim. Not sure that anyone has been successful in recouping $ in this fashion from paid endorsements like Singh, Toms, PGA Tour, etc.

[cardinal]

Birdie: Trustees and receivers go after payments made to Ponzi scheme investors all the time, notwithstanding the investors' lack of knowledge of the scheme. Well before Madoff, Ponzi schemes were the subject of much litigation (and commentary) in bankruptcy.. And, depending on the circuit, payments received by investors as purported profits may be deemed fraudulent as a matter of law (as actual fraud instead of constructive fraud; the existence of a Ponzi scheme is sufficient to establish actual intent by the debtor to defraud creditors). Because the source of any profits received by the profiting investors is essentially a theft from other investors, the payments received as profits may be fraudulent transfers as a matter of law.

Also -- again assuming that Texas law contains a similar safe harbor -- a transfer to a qualified charitable or religious entity cannot be avoided as a constructively fraudulent transfer as long as the contribution does not exceed 15 percent of the gross annual income, or even a higher percentage if the debtor regularly gave higher amounts in the past. (The safe harbor does not apply to transfers made by a debtor with actual intent to defraud). Congress added this charitable contribution exception to the Bankruptcy Code after trustees successfully pursued churches to recover tithes, etc. back in the 1980s and 1990s.