Fifth Circuit Holds Stanford Receiver Could Not "Clawback" Interest Payments from Innocent Investors

The Fifth Circuit, in Janvey v. Adams (No. 09-10761 Nov. 13, 2009)(Download Opinion_of_Appeals_Court_from_Hearing_Regarding_Claw_Backs), recently held that the receiver for the Stanford interests, appointed to conserve, hold, manage and preserve the value of the receivership estate, had no authority to recover payments of interest from investors who received the payments prior to the receivership.  The receiver wanted to recover the payments as assets of the estate and distribute them pro rata to all victims of the fraud.  The SEC, however, argued that it would be inequitable to allow the receiver to bring "clawback" claims against innocent investors.  The court agreed with the SEC.

The Court examined the lightly-analyzed issue of who may be named as a "relief defendant" in SEC enforcement actions and applied a two-prong test: a relief defendant (1) has received ill-gotten funds, and (2) does not have a legitimate claim to those funds.  While the investors certainly received ill-gotten funds, the receiver failed to establish that the investors lacked a legitimate claim to the proceeds.  It was undisputed that the investors received the payments as interest pursuant to written CD agreements with the Stanford Bank.  Since the investors could not be considered proper relief defendants, the district court lacked authority to freeze their accounts. 

While the Fifth Circuit's opinion does not discuss issues under fraudulent conveyance law, the holding suggests that this court would not consider such theories favorably.