April 6 (Bloomberg) -- Stanford Group Co. investors asked a federal appeals court to order a Dallas judge to unlock brokerage accounts frozen when U.S. regulators sued R. Allen Stanford over an alleged Ponzi scheme and seized his assets.

Lawyers for investors argued in court papers that U.S. District Judge David Godbey lacked authority to place into receivership Stanford’s Antigua-based bank, which is at the center of the alleged $8 billion fraud. Godbey twice violated investors’ constitutional rights by freezing their accounts and denying them a chance to object, according to a copy of the filing today with the U.S. Court of Appeals in New Orleans.

“Petitioners have no other means of relief because the district court will not rule on their motions to intervene, hold an evidentiary hearing or permit their counsel to represent them in court,” Michael Quilling, the lead investors’ lawyers, said in the filing. “If the injunction is allowed to stand, the receiver will continue his seizure of all or a portion of the funds in their frozen accounts and distribute them pro rata to all investors in this case.”

The Securities and Exchange Commission sued Texas billionaire Allen Stanford, two of his deputies and three related companies on Feb. 17, accusing them of engineering a “massive ongoing fraud” through the sale of certificates of deposit in Antigua-based Stanford International Bank. Godbey seized all of Stanford’s corporate and personal assets and placed them under the control of receiver Ralph Janvey.

Receiver’s Opposition

In papers filed late today in federal court in Dallas, Janvey reiterated his claim that investors have no right to join the SEC case and said adding them would make his job more complicated and expensive. He didn’t address the constitutional or sovereignty issues the investors raised in their appellate court filing.

Janvey said that his latest funds-release plan will let investors appeal his decisions to Godbey and that he’s willing to compromise on how he views investors’ accounts. He said investors who can prove that part of their money isn’t tainted by contact with the offshore CDs may qualify to have those funds unfrozen, even if the rest stays locked.

“The receiver expects to begin submitting proposed compromises to the court in the next few days,’’ Timothy Durst, one of Janvey’s lawyers, said in the filing.

Stanford’s Denial

Stanford, 59, was named the world’s 605th richest individual by Forbes Magazine last year, with an estimated net worth of more than $2 billion. The SEC accused the Texas financier of skimming as much as $1.6 billion in personal loans from his companies. Stanford has denied any wrongdoing.

Stanford, in an interview broadcasted today by ABC News, denied wrongdoing and said he expects to be indicted by a grand jury in about two weeks.

“I will die and go to hell if it’s a Ponzi scheme,” he said in an interview excerpt on the ABC News Web site. “It’s no Ponzi scheme.”

He added, “If it was a Ponzi scheme, why are they finding billons and billions of dollars all over the place?”

In the February asset freeze order, Godbey included about 32,000 brokerage accounts held at Pershing LLC and JPMorgan Chase & Co. in the name of Stanford customers. In March, Godbey released roughly 28,000 of these brokerage accounts, containing about $4.6 billion, at Janvey’s request.

Freeze Extension

Godbey has extended the freeze on about 4,000 remaining accounts, worth roughly $1.7 billion, while Janvey determines whether they benefited from fraudulent activity. These frozen accounts are owned by Stanford executives and employees, contain the suspect Antiguan CDs or share common ownership with accounts in those categories, according to court papers.

“Petitioners never had an opportunity, either before or since, to contest the freezing of their assets,” Quilling said in today’s filing. He said Godbey refused to hear the investors’ complaints at either of two hearings in Dallas federal court, although dozens of their lawyers attended.

Godbey has approved a Janvey plan that will let investors apply to have their remaining accounts unlocked. The plan requires account holders to certify their funds aren’t tainted by the fraud, agree not to sue the receiver and to abide by all of Godbey’s decisions regarding their money.

Janvey Plan

The plan requires investors to “surrender fundamental rights in exchange for the mere possibility that the receiver might allow them to have access to their own property,” Quilling said in the filing.

The investors challenged whether Janvey and Godbey have the jurisdictional authority to recover Stanford’s assets outside of the U.S. in order to repay the offshore CD holders, 85 percent of whom aren’t U.S. citizens. The Antiguan government seized Stanford’s extensive real estate holdings on the island and placed them under its own receiver, who claims sole authority over all of Stanford’s non-U.S. assets as well as sole obligation to repay the Antiguan bank’s depositors.

“A U.S. district court does not have the jurisdiction to appoint a receiver to wind up the operations of a foreign entity,” Quilling said of the territorial dispute. The U.S. and Antiguan receivers “are in direct conflict with each other,” he said in the filing.

Supreme Court

Quilling said the U.S. Supreme Court and other appellate courts have ruled in other cases that the U.S. government must respect the sovereign authority of other nations to control their own institutions “free from the meddling from others.”

“If an Antiguan court were to appoint a receiver for Bank of America and thrust it into involuntary receivership, the court would certainly uphold the United States’ own sovereignty and decline to recognize that order in any respect whatsoever,” Quilling said.

Janvey didn’t immediately respond to a request for comment.

If the New Orleans appellate court refuses to immediately release the investors’ accounts or to force Godbey to do so, the investors asked to be allowed to formally intervene in the regulatory case and have Godbey hear their complaints on an expedited basis.

The case is In Re Robb A. Nen, 09-10325, U.S. Court of Appeals for the Fifth Circuit (New Orleans).

To contact the reporter on this story: Laurel Brubaker Calkins in Houston at laurel@calkins.us.com.

Last Updated: April 6, 2009 22:56 EDT