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Elephants and Donkeys Find Unhappiness In Sir Scam-A-Lot's Court

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Sir Allen Stanford a/k/a "Sir Scam-A-Lot" ran an enormous Ponzi scheme through his business empire centered in Antigua. Suckers gave Sir Scam-A-Lot nearly $7 billion thinking they were legitimately making an impossibly high rate of return because of Sir Scam-A-Lot's financial genius. Later, Sir Scam-A-Lot was sentenced to 110 years in prison. Because federal time is "hard" time, he'll probably not spend a lot of time wondering what he will do when he gets out.

To attempt to obtain political cover while running his scheme, Sir Scam-A-Lot make over $1.6 million in donations to both political parties, in the sums of $950,500 to the Democratic Senatorial Campaign Committee (DSCC); $238,500 to the National Republican Senatorial Committee (NRCC); $200,000 to the Democratic Congressional Campaign Committee (DCCC); $128,500 to the Republican National Committee (RNC); and $83,345 to the National Republican Congressional Committee (NRSC).

When Sir Scam-A-Lot's pyramid collapsed (as they all do), the Court appointed a Receiver to sort out the mess and try to recover the suckers' moneys -- including these campaign contributions. So, the Receiver filed fraudulent transfer actions under the Texas Uniform Fraudulent Transfers Act (TUFTA) against the Committees.

In a nutshell, a fraudulent transfer action is one against somebody (a/k/a "transferee") who has improperly received something from a debtor, and the debtor didn't receive anything back in return that would be of value to creditors. Gifts are almost always fraudulent transfers because the recipient of the gift didn't give anything back ("reasonably equivalent value") that creditors could take and sell. Contribution to political parties are considered gifts; I'll let the rest of you speculate on whether the donor gets anything back in exchange for their donation -- whatever it is, though, is probably of no value to creditors.

At this point, we find that Democrats and Republicans can agree on one thing -- they don't want to give money back. Thus, the Committees joined together to fight the Receiver, and this litigation ensued, ending up before the U.S. Court of Appeals for the Fifth Circuit, which rendered this Opinion.

The Committees first argued that a Receiver cannot bring a fraudulent transfer action, but rather the suckers must do that in their own names and for themselves. The Court of course rejected this on the basis that the very purpose of a Receiver is to represent the suckers in litigation to recover their money.

The next issue was more difficult, since the Committees argued that the Receiver could have known about the political donations around the time when they were made, because by law they were posted on the website of the Federal Election Commission, and thus the Receiver's TUFTA action was outside the Statute of Limitations.

The Court, however, rejected this claim as well, noting that: "[e]ven if the existence of the donations was discoverable, their fraudulent nature was not."

There was also a great deal of sympathy shown to the Receiver, who had to get his arms around an extraordinary financial mess, and thus it quite reasonably took him a while to figure out where the money went:

Given the extent of the Stanford enterprises, it would not have been reasonable to expect him to immediately discover the fraud.

Finally, the Committees argued that the federal election laws pre-empted the TUFTA claims, but the Court found that there was no evidence of any intention of Congress to take over the field of fraudulent transfer claims. Nor was the Court impressed with the Committees' claims that under federal law they were prohibited from returning money or giving it to the Receiver, but were required to spend it:

We find this argument unpersuasive. It depends on characterizing the Receiver's TUFTA claim as a refund, which as previously discussed is inaccurate because the TUFTA claim is brought on behalf of the creditors of the Stanford Defendants and alleges that the contributions should not have been made in the first place. Furthermore, the Receiver does not seek recovery of the exact soft money funds that the Committees asserts have now been spent.

And with that, the Court ruled that the probably one thing the two parties could agree on was just flat wrong, and made them return Sir Scam-A-Lot's money to the Receiver.

U.S. v. Janvey, 2012 WL 5207460 (5th Cir., Oct. 23, 2012). Original Opinion at http://goo.gl/5Q3dW

This article at http://onforb.es/QRhWb5 and http://goo.gl/njFhJ