When it comes to laying claim to the lucrative remains of fallen fraud empires, the DOJ is certain it can serve victims better than expensive court-appointed receivers, trustees or liquidators.

John Pacenti

When it comes to laying claim to the lucrative remains of fallen fraud empires, the Justice Department is certain it can serve victims better than expensive court-appointed receivers, trustees or liquidators.

Even before R. Allen Stanford’s fraud conviction last week, the Justice Department was fighting the joint liquidators for his defunct financial empire for $330 million in three countries: Canada, Switzerland and the United Kingdom.

The Justice Department got a boost from jurors who convicted Stanford of running a $7 billion Ponzi scam by selling purportedly high-yield certificates of deposit from Stanford International Bank in Antigua.

The bank had posh offices in Miami and maintained a security office in Fort Lauderdale.

In the criminal forfeiture portion of Stanford’s trial, the Houston jury decided Thursday that evidence showed the one-time billionaire used international accounts to squirrel away money stolen from investors. The decision clears the way for the Justice Department to go after the $330 million in other jurisdictions.

But as the Justice Department found in the Scott Rothstein fraud case in South Florida, it’s going to have a fight on its hands.

U.S. District Judge James I. Cohn in Fort Lauderdale ruled last summer that prosecutors could administer recovered funds to repay up to $363 million in valid claims from the $1.2 billion Ponzi scheme run by the disbarred Fort Lauderdale law firm chairman. But victims haven’t seen a cent because the bankruptcy trustee for Rothstein’s defunct law firm has appealed Cohn’s decision.

Prosecutors argued they would put more money in Rothstein victims’ pockets because they don’t deduct legal fees or expenses.

Attorneys for the trustee said the decision turned well-established bankruptcy law on its head.

Miami attorney Ed Davis, who represents the liquidators for Stanford International Bank, said it would be wrong to assume the government can administer seized funds more efficiently, especially when it comes to Stanford’s victims. He said the Justice Department is ill-equipped to locate Stanford’s victims, many of whom live in Latin America.

“We disagree with the DOJ that forfeiture is actually helpful to the victims,” said Davis, a partner at Astigarraga Davis. “We believe our estate gets it back to them faster, cheaper and fairer.”

Latin American Investors

Davis represents the joint liquidators overseeing the remains of Stanford’s international empire: accountants Marcus Wide of the British Virgin Islands and Hugh Dickson of the Cayman Islands. Both are with Grant Thornton.

Ralph Janvey, a court-appointed receiver in Texas, oversees Stanford’s remaining assets in the U.S. and has been a lightning rod for criticism. Victims want to know why he has spent 50 cents for every $1 he has collected, netting the estate just $106 million as of last fall. The high expenses play into the hands of the Justice Department’s criticism of receiverships.

But Davis said it doesn’t have to be that way, noting the international liquidators have frozen $307 million for victims, spending about 4.5 cents for every $1 collected.

Wide and Dickson also say the widely reported $7 billion figure for Stanford’s fraud is really more in the range of $ 4 billion to $4.5 billion, Davis said. The discrepancy comes from counting interest paid on the fictional CDs.

There’s another issue as well. With most Stanford investors in Latin America, Davis believes they are unlikely to file claims with the Justice Department in the Houston case.

Justice spokeswoman Laura Sweeney said a gag order in the U.S. receivership prohibits prosecutors from talking about the issue.

Many foreign investors expected their investments to be kept secret from their respective governments. The Justice Department is bound by international treaties to report payments to the victims.

“It could be dangerous for them,” Davis said. “If that information is made public, they could be kidnapping targets.”

Attorney Martin Press, a Gunster partner in Fort Lauderdale, said that is a very likely scenario.

“We represent many foreigners who live in fear of government, who are afraid of being on the radar of any government, whether they have done anything wrong or not,” Press said. “The United States Government is looking for justice, and in pursuing justice it really does not consider whether people will be making claims or whether it winds up in the coffers of the United States.”

If Stanford fraud victims don’t file claims, the beneficiary of any undistributed money would be the U.S. Treasury.

Disputed Assets

Press said this type of tension between bankruptcy receiverships and prosecutors can be expected going forward.

“There is always an issue between the U.S. Government and its court-appointed receivers as to who gets the proceeds,” he said.

“Receivers look at bankruptcy as an orderly process where there is court oversight and administered by professionals who have expertise in these types of cases, which is generally true. However, there are normally very large fees generated,” he said.

Davis said one reason expertise and court oversight is necessary is the assets are not all cash; some are investments in hedge funds. He said frozen assets include $208 million in Switzerland, $110 million in England and $18 million to $22 million in Canada.

Just like in the Rothstein case, the tug of war means victims will have to wait longer to recover their money.

Each request by the Justice Department must be evaluated by the countries with frozen assets.

In England, the Justice Department sought to repatriate the money, but the liquidators objected and filed a motion to dismiss a restraining order freezing the money. A hearing is set in June.

In Canada, the liquidator is fighting not only the Justice Department but Janvey as well.

Wide and Dickson became liquidators after an Ontario court became aware their predecessors had improperly erased computer account information. Janvey asserted his rights to the Canadian money but backed off when the Justice Department inserted itself into the fray.

Davis said he is puzzled by Janvey’s surrender. “It’s diametrically in opposition to what a receiver is supposed to do,” he said.

The Switzerland accounts were frozen because of suspicious activity reports, complicating matters with Swiss regulators, Davis said.

Unlike in bankruptcy courts, there is no oversight of Justice Department claims decisions, he added.

“While we have nothing but respect for what DOJ has done and the conviction of Allen Stanford, its efforts to continue to forfeit the money is detrimental to the interest of the victims,” Davis said. “We want it handled in a manner that is overseen with due process.”

“The United States government is looking for justice, and in pursuing justice it really does not consider whether people will be making claims or whether it winds up in the coffers of the United States.”Martin PressPartnerGunster”While we have nothing but respect for what DOJ has done and the conviction of Allen Stanford, its efforts to continue to forfeit the money is detrimental to the interest of the victims. We want it handled in a manner that is overseen with due process.”