Stanford Investors Must Repay Bogus CD Profits, Judge Says

R. Allen Stanford’s defrauded investors must repay any interest they earned on the bogus certificates of deposit at the heart of the convicted Texas financier’s $7 billion Ponzi scheme, a Dallas judge ruled.

About 800 investors had urged U.S. District Judge David Godbey to reject lawsuits by Ralph Janvey, Stanford’s court-appointed receiver, seeking recovery of more than $220 million in profits they’d taken out of Stanford’s scheme before it was shut down by U.S. securities regulators in February 2009.

“The court recognizes that forcing net winners to pay back interest payments will cause some pain,” Godbey wrote in a 32-page order released today in federal court in Dallas. “But for victims of a Ponzi scheme, everyone is a loser. And the net winners will be in far better shape, having recovered at least their principal, than most Stanford victims, who lost everything.”

Godbey ruled that while investors have legitimate claims to recover the money they originally invested in a fraud scheme, they have no contractual claim to any interest from those funds because investment contracts with a Ponzi scheme are unenforceable.

Fictitious Payments

“Judge Godbey agreed with the receiver’s position that the fictitious interest payments that Stanford made to investors on their Stanford International bank CDs simply represented money taken from one set of investors and paid to another; it was just part of Stanford’s efforts that kept the Ponzi scheme going for well over a decade,” Kevin Sadler, Janvey’s lead attorney, said in an e-mailed statement.

Stanford, 62, was convicted in March of stealing more than $2 billion in investor deposits at his Antigua-based bank to fund a lavish personal lifestyle and bankroll money-losing private enterprises ranging from Caribbean airlines to cricket tournaments. He is serving a 110-year sentence in a Florida federal prison while he appeals that verdict.

Janvey has asked Godbey’s permission to distribute $55 million of the funds he has recovered from Stanford’s estate to more than 17,000 investors within the next few months. That payment represents about one cent on the dollar of the funds investors lost through the scheme, according to court documents.

The case is Janvey v. Alguire et al, 3:09-cv-0724, U.S. District Court, Northern District of Texas (Dallas).

The criminal case is U.S. v. Stanford, 09cr342, U.S. District Court, Southern District of Texas (Houston). The SEC case is Securities and Exchange Commission v. Stanford International Bank, 09cv298, U.S. District Court, Northern District of Texas (Dallas).

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