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Class Action Latest Suit Counsel Handling Against Stanford Group Co.
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(February 23, 2009 - Monday) - http://www.law.com/jsp/tx/PubArticleTX.jsp?id=1202428450503
By Mary Alice Robbins
Texas Lawyer
February 23, 2009
On Feb. 17, when the U.S. Securities and Exchange Commission filed a complaint against financier R. Allen Stanford, two of his colleagues and three of his companies for allegedly engaging in a $9.2 billion investment fraud, the SEC's allegations were not news to Houston solo Mike O'Brien.
"I've been dealing with Stanford matters since December 2007," says O'Brien, who represents two of Stanford Group Co.'s former financial advisers who allege in a wrongful-termination and employment discrimination suit that they were constructively discharged after "they learned that Stanford employed illegal and unethical methods to market and sell its financial products to the public."
O'Brien says the public disclosure of D. Mark Tidwell's and Charles W. Rawl's allegations about how Stanford Group Co. (SGC) operated "led to the knowledge that stimulated the regulatory authorities to get interested" in Stanford and his companies.
In its civil complaint in Securities and Exchange Commission v. Stanford International Bank, et al., filed in the U.S. District Court for the Northern District of Texas in Dallas, the SEC alleges Stanford and his co-defendants engaged in "a massive ongoing fraud" that involved misleading investors about the financial products they sold, including certificates of deposit offered by Antigua-based Stanford International Bank (SIB).
"Through this fraudulent scheme, SIB acting through a network of SGC financial advisors has sold approximately $8 billion of self-styled 'certificates of deposits' by promising high return rates that exceed those available through true certificates of deposits offered by traditional banks," the SEC alleges in the complaint.
Just hours after the SEC filed its civil complaint against Stanford and the other defendants in the U.S. District Court for the Northern District of Texas in Dallas, O'Brien and George Fleming, principal in Houston's Fleming & Associates, filed a class action against Stanford and nine other defendants on behalf of four Stanford investors.
The plaintiff investors allege in their complaint in Adams, et al. v. Stanford Group Co., et al., filedin the U.S. District Court for the Southern District of Texas in Houston, that, collectively, they invested at least $1.75 million in SIB certificates of deposit and that, along with other Stanford investors, they have lost their money. [See the 14th Court of Appeals' opinion in In Re: Stanford Group Co. v. Tidwell, et al.]
"We want to know where the investors' money went and we're fixing to find out," Fleming writes in a statement announcing the filing of Adams.
Telephone calls placed to Stanford Group Co. and other Stanford entities located in Houston were not answered. Telephone calls to the number SGC listed for media contacts were routed to the SEC.
Kimberly Garber of Fort Worth, the SEC's associate regional director, says, "Our allegations involve $8 billion in certificates of deposit as well as $1.2 billion in an asset allocation program."
In a Feb. 16 order, U.S. District Judge Reed O'Connor of Dallas granted the SEC's motion for a temporary restraining order and its request to freeze the defendants' assets. O'Connor also appointed Ralph Janvey, a partner in Krage & Janvey in Dallas, as the receiver. Janvey did not return two telephone calls seeking comment before presstime Feb. 19.
Garber says, "The receiver is actively working to secure assets and retain any assets that are remaining." But Garber says that, at this point, the amount of the assets is unclear.
Individuals named as defendants in the SEC complaint are Stanford, SIB's chairman of the board and sole shareholder; James M. Davis, SIB's chief financial officer; and Laura Pendergest-Holt, SIB's chief investment officer. SIB, Stanford Group and Stanford Capital Management also are named as defendants in the SEC complaint. U.S. District Judge Sam Lindsay is assigned to the case. A message left at a telephone listing for James M. Davis in Baldwyn, Miss., was not returned. A telephone listing for Pendergest-Holt in Houston could not be found. According to ABC News, Stanford has hired Brendan V. Sullivan Jr., a partner in Williams & Connolly in Washington, D.C. Sullivan did not return a telephone call seeking comment before presstime on Feb. 19.
Among other things, the SEC is alleging violations of various federal securities laws against all defendants and is alleging aiding and abetting violations of securities law against the individual defendants.
In its complaint, the SEC alleges that SIB's CDs are not as liquid and secure as touted and that only Stanford and Davis know the details of SIB's investment portfolio. The SEC further alleges that SIB and SGC violated §7(d) of the Investment Company Act of 1940 by failing to register with the Securities and Exchange Commission in order to sell SIB's certificates of deposit.
Also in the complaint, the SEC alleges that defendant Stanford Capital Management misrepresented the historical performance of the asset allocation program, an in-house mutual fund program called Stanford Allocation Strategy. The SEC alleges that "the fraudulent SAS performance was used to recruit registered financial advisers with significant books of business, who were then incentivized to re-allocate their clients' assets to SIB's CD program."
The plaintiffs in the Adams class action are Milton Jerald Edrington and Ben Gomez of Houston, Michael Hicks of Wimberley and Jerry Adams of Stillwell, Okla. The 10 Adams defendants include SIB, Stanford Group Co., Stanford Financial Group and others.
Adams has been assigned to U.S. District Judge Vanessa Gilmore of Houston. The plaintiffs allege violations of federal securities laws against all defendants and allege aiding and abetting violations of federal securities law against the individual defendants.
Among other things, the Adams plaintiffs allege in their complaint that the defendants "fraudulently induced" them and others "to purchase investments being marketed by Stanford through the use of materially false and misleading Monthly Account Statements, sales materials and oral presentations."
As alleged in the Adams complaint, defendant SGC aggressively pushed its financial advisers to sell SIB certificates of deposit, which promised investors higher interest rates than CDs offered by other banks. As alleged in the Adams complaint, SGC rewarded its financial advisers through a campaign, known as "The Contest," which included an "SIB Scoreboard" that tracked the performance of each group of financial advisers. The Adams plaintiffs allege in theircomplaint that SGC advisers received a 1 percent commission if they sold $2 million of the CDs in a quarter. The commissions were paid from a 3 percent referral fee payable to Stanford Group on every CD sold, the plaintiffs allege in their complaint.
"They were trying to engage their sales force, and they were trying to incentivize them to sell more stuff by paying them commissions," Fleming says in an interview.
The Adams plaintiffs allege in their complaint that Stanford Group rebuffed questions raised by some advisers regarding how the company could pay 7 percent rates of return on investments of $100,000.
"To allay advisors concerns and facilitate sale of the foreign CDs, senior management at SGC and SIB had to create the appearance of a liquid, stable and secure CD comparable to the risk associated with a familiar domestic CD," the Adams plaintiffs allege in the complaint.
Securities lawyer Thomas R. Ajamie, managing partner of Ajamie LLP in Houston, says the Adams class action is premature. "There is no reason to file a suit right now," Ajamie says.
Ajamie says his firm has signed up four or five Stanford investors as clients and he has a list of people to call back. "Our phones have been ringing off the hook," he says, noting that the firm first began receiving calls from worried investors on Feb. 13, after news reports surfaced about the SEC's investigation of Stanford and his companies.
But Ajamie says he does not plan to file litigation until the receiver has done his work. "That's the first step," he says.
The receiver must account for the funds invested with the Stanford entities, a process that could take as long as two or three years, Ajamie says. He also says the receiver probably will seek to block the Adams class action.
But Fleming says, "What may seem premature to someone just coming on this for the first time is not premature to someone who's worked on it for six months."
Fleming says the Feb. 16 court order that granted the SEC's motion for a TRO and froze the defendants' assets expires March 2, when the U.S. District Court in Dallas has scheduled a hearing on the SEC's motion for a temporary injunction.
"We felt we were prudent in going ahead with the [ Adams ] lawsuit," Fleming says.
Fleming says the legal battle that Tidwell and Rawl have had with SGC provided the genesis for the Adams class action.
The two former SGC financial advisers filed Tidwell, et al. v. Stanford Group Co. in April 2008 in Houston's 189th District Court after SGC initiated arbitration proceedings against them. SGC answered the suit with a motion to compel arbitration, which the trial court denied, prompting SGC to petition the 14th Court of Appeals for a writ of mandamus.
According to the 14th Court's Dec. 9, 2008, opinion in In Re: Stanford Group Co. v. Tidwell, et al., the Uniform Application for Securities Industry Registration or Transfer form that Tidwell and Rawl each signed when they went to work for SGC contained an arbitration clause. The opinion further noted that Tidwell and Rawl also executed various promissory notes payable to SGC, and the promissory notes also contained arbitration clauses.
Chief Justice Adele Hedges wrote in the 14th Court's opinion in In Re: Stanford Group Co. that the parties dispute the basis for Tidwell's and Rawl's December 2007 departure from the company. "Stanford Group claims they were terminated, while Tidwell and Rawl claim that they were forced to resign," Hedges wrote.
As noted in the 14th Court's opinion, Tidwell and Rawl contended that they were constructively discharged "for refusing to engage in Stanford Group's unethical and illegal business practices," including violating Financial Industry Regulatory Authority regulations by "overstating the asset value of individuals in a manner designed to mislead potential investors." Hedges wrote that Tidwell and Rawl contended Stanford Group's conduct is actionable under the Texas Supreme Court's 1985 decision in Sabine Pilot Services Inc. v. Hauck, which created an exception to the state's employment-at-will doctrine. But the Supreme Court held in 2008's In Re: Next Financial Group Inc. that the Sabine Pilot exception did not apply if a claim is subject to arbitration.
The 14th Court concluded that the 189th District Court had erred in denying SGC's motion to compel arbitration.
Andrew R. Harvin, who represents SGC in the arbitration and in the state district court suit filed by Tidwell and Rawl, declines comment. "Since the company's under receivership, I have not been authorized to speak," says Harvin, a partner in Doyle, Restrepo, Harvin & Robbins in Houston.
O'Brien says that although Tidwell and Rawl lost their bid to continue their wrongful-termination suit in the state district court, they have made "declarations" to the SEC regarding their allegations about SGC's operations. The SEC filed the Tidwell and Rawl declarations as exhibits with the Feb. 17 complaint against Stanford and the other defendants.
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