by T. GormanPosted on Posted in SECActions

In the stream of Ponzi scheme and other investment fund fraud cases that have been brought by DOJ, the SEC, the CFTC and private litigants, there is frequently a mad scramble for the money. The SEC and CFTC typically seek a freeze order. Frequently, a receiver will be appointed to marshal the assets and pursue claims for the defrauded investors. Private litigation often follows.

Almost lost in the tangle of claims is the investor who wants his or her money back. Sometimes, that means their account balance as shown on statements that they received from the fund. Typically, those statements depict principal along with its appreciation from whatever trading scheme the fraudster claimed to be implementing. Sometimes that means just the principal. All too frequently, it is whatever they can get.

In the maze of claims, those who should be on the same side sometimes end up on opposite sides. Such is the case in Janvey v. Adams, Case No. 09-10761 and Janvey v. Letsos, Case No. 09 – 10765, both decided by the Fifth Circuit Court of Appeals on November 13, 2009. The cases arise out of the alleged Ponzi scheme operated by the Stanford companies, reputedly a network of some 130 entities in 14 countries controlled by R. Allen Stanford. In the SEC’s enforcement action, SEC v. Stanford Int’l Bank, Ltd., Case No. 3-09-0298 (N.D. Tex. Filed Feb. 17, 2009), discussed here, the agency obtained a freeze order over funds belonging to the Stanford parties. The district court also appointed Ralph S. Janvey as Receiver with significant authority. The court granted a preliminary injunction prohibiting any disbursement of funds or securities.

Subsequently, the Receiver named as “relief defendants” several hundred investors who had invested in, and received proceeds from, Stanford CDs. These of course are the victims of the fraud. Some of these investors received principal payments while others were paid interest. The SEC argued that the Receiver was asserting “clawback” claims which were inequitable because they were brought against innocent investors. The district court agreed and denied a request to freeze the return of principal payments from the CDs, but permitted one as to the interest.

The Fifth Circuit affirmed as to the principal payments but reversed as to the interest. A relief defendant – actually a “nominal defendant” – is not accused of any wrong doing, the court explained. A person is only added as a relief defendant to facilitate collection. Accordingly, a federal court may order equitable relief against such a defendant only where “that person (1) has received ill-gotten funds, and (2) does not have a legitimate claim to those funds.” Where the party has a legitimate ownership interest in the property however, the person is not properly joined as a relief defendant.

In this case, the Receiver satisfied the first prong of the test. The payments to investor defendants came from funds that had been ill-gotten by the Stanford interests. The Receiver however, failed to establish the second prong of the test. Here, there is no question that the investors had investments in the CDs. That ownership interest precludes the person from being a proper relief defendant. Accordingly, the district court lacked authority to freeze the investor defendants’ assets. The SEC supported the investors in the assertion of this position.

The court’s decision in Janvey constitutes an important reaffirmation and clarification of the basic theory of relief defendants. With many investors, receivers and government agencies are pursing limited pools of funds left in the wake of collapsed Ponzi schemes and investment funds, the decision offers clear guidance on the basic principles which apply to adding persons as relief defendants.

by T. GormanPosted on Posted in SECActions

FCPA enforcement continues to be a key Justice Department priority. This year, there have been three trials of FCPA cases and three guilty verdicts. Two of the defendants have been sentenced with Frederic Bourke receiving one year and a day, discussed here, and former congressman William Jefferson 13 years on a number of counts. With over 120 open investigations, there can be little doubt that more cases and more trials are on the way.

On Friday, Charles Jumet pleaded guilty to a two count information based on participating in a conspiracy to bribe Panamanian officials in connection with obtaining business under a maritime contract. U.S. v. Jumet, (E.D. Va. Filed Nov. 13, 2009). One count charged the defendant with conspiring to make corrupt payments to a foreign government official in violation of the FCPA. The second charged Mr. Jumet with making a false statement.

According to the court papers, beginning in December 1997 and continuing through July 2003, Mr. Jumet made a series of corrupt payments which totaled about $200,000 to the former administrator and his deputy of Panama’s National Maritime Ports Authority. Payments were also made to a former high-ranking executive official of the Republic of Panama. As a result of the payments, Mr. Jumet and Ports Engineering Consulting Corporation were awarded a no-bid 20 year concession to perform the work along the waterway.

Ports Engineering, a Panama company, was used to make the payments. That entity is affiliated with Overman Associates, an engineering firm based in Virginia Beach, Va. Ports Engineering was created, according to statements made by Mr. Jumet during his plea, so that Overman Associates and others could obtain the maritime contract from the Panamanian government.

As one point, the Panama government investigated the award of a contract to the company. Specifically, in 2000 Panama’s Comptroller General’s Office suspended the contact which had been awarded to Ports Engineering without the solicitation of any bids from other firms. In 2003, the government resumed making payments to Ports Engineering.

The false statement was made as part of an effort to conceal one of the bribe payments made to secure the contract. In December 1997 a check payable to bearer for $18,000 was deposited into the account of a former high ranking elected official. When federal agents inquired about the check, Mr. Jumet falsely claimed the payment was a campaign donation. In fact, the check was part of the payments made to secure the contract.

Mr. Jumet is cooperating with the on-going DOJ investigation. His sentencing is scheduled for February 12, 2010. See also http://www.justice.gov/opa/pr/2009/November/09-crm-1229.html.