U.S. District Judge David C. Godbey said last month that he may turn the case over to a bankruptcy court.
The issue is important to hundreds of residents in the Baton Rouge, Lafayette and Covington areas because as much as $1 billion of their money vanished last year when federal authorities shut down Stanford’s worldwide operations.
Across the globe, more than 25,000 investors lost money to Stanford, 60, who has remained in federal custody since June. He is scheduled for trial in January.
Investors and attorneys are divided as to whether bankruptcy would provide more money to devastated victims than the receivership.
Jean Anne Mayhall, of Folsom, is a partner in a small business. She saw the firm’s pension plan lose more than $1 million in the Stanford collapse.
Mayhall said Friday that moving the Stanford receivership into bankruptcy possibly could help defrauded investors persuade the Securities Investor Protection Corp. to cover some of their losses.
Although SIPC has provided more than $500 million to victims of convicted fraud artist Bernard Madoff, of New York, the broker-dealer-funded non-profit has refused to help Stanford victims.
“The very first rule is that the (Stanford) companies must be liquidated,” Mayhall said, adding that placement of the Stanford firms into bankruptcy would be the first step toward liquidation.
Once in bankruptcy, Mayhall said, SIPC possibly could be persuaded to cover losses up to $500,000 per individual account.
Blaine Smith, of Baton Rouge, agreed. Smith lost about $1.5 million in retirement savings to Stanford.
“Bankruptcy court is where they should have gone in the first place,” Smith said.
But Phillip W. Preis, a Baton Rouge attorney for more than 100 Stanford victims, said Friday that transfer of the case to bankruptcy court would cost investors more of their salvaged funds. And, he added, the move probably would not persuade SIPC officials to extend coverage to the Stanford case.
“I don’t see it happening,” Preis said.
Preis said SIPC helped Madoff victims because their money was never invested in anything. Madoff just pocketed investors’ cash and sent them phony earnings statements.
Stanford invested his clients’ money, but lied about the kinds of investments that he made and the thefts that he allegedly committed, Preis said.
The kinds of frauds Stanford is accused of committing are much more common than that of Madoff, Preis said. So, opening the door to that type of coverage would bankrupt SIPC, he said.
In Dallas, Godbey has listened to additional arguments, a transcript of a recent court hearing shows.
Attorneys for the Securities and Exchange Commission and the court-appointed receiver, as well as an examiner representing the interests of all investors, asked Godbey not to throw the case into bankruptcy. All argued that such action would further drain assets recovered by the receiver for investors.
But Gregory A. Blue, a New York attorney representing hundreds of Stanford victims, argued that bankruptcy proceedings could be no more expensive than the receivership team put together by Dallas attorney Ralph S. Janvey.
Since the receivership was established 13 months ago, Janvey has recovered less than $200 million while billing the receivership estate for more than $40 million in fees and expenses, court records show.
“Bankruptcy is not the magic bullet,” Kevin Sadler, an attorney for Janvey, told the judge. “Bankruptcy, I believe, would lead to serious delay, serious costs, and deplete the (receivership) estate.”
Janvey then received support from one of his most vocal critics — Dallas attorney John J. Little, the court-appointed examiner representing the interests of Stanford victims.
“Let me just say, from the investors’ viewpoint, if this were a popular vote, the receiver (Janvey) would lose,” said Little, who repeatedly has criticized Janvey’s efforts as too expensive.
But Little added: “I can’t convince myself that moving to bankruptcy will somehow make life better for the investors at the end of the day.”
Blue then said Little should be replaced by a creditors’ committee if the case remains in receivership.
Blue told Godbey that various investor groups disagree as to whether the case should continue in receivership or be moved to bankruptcy court.
The disagreements are too serious for one person to handle, Blue added.
An example, Blue said, is the divide between the majority of investors who lost most or all of their savings, and several hundred who were lucky enough to recover all of their money before the SEC closed Stanford down.
Last year, Janvey twice attempted to claw back nearly $900 million from the innocent winners over the opposition of the SEC.
Janvey wanted to distribute the winners’ money among all the Stanford investors. But Godbey and the 5th U.S. Circuit Court of Appeals ruled against him.
“There are winners and losers in the clawback,” Blue told Godbey. “The people who are the losers on that undoubtedly would want to see the money clawed back. The people who are winners don’t.”
Bankruptcy rules are different from those for federal district courts, so Preis was asked Friday whether a transfer to bankruptcy court could re-open the clawback issue.
“A ruling of the 5th Circuit is binding,” Preis said. “That would be binding against the bankruptcy trustee just like it was against Janvey in his receivership.”
Godbey took the matter under study last month. A check of court records Saturday showed that the judge had not yet ruled on the issue.