Judge Won't Compel Arbitration in Stanford Case

Editor’s note: Due to an error by senior reporter John Council, Kevin Sadler was quoted incorrectly in an earlier version of this article.

U.S. District Judge David Godbey of Dallas has ruled that the receiver he appointed to recover millions of dollars taken in R. Allen Stanford “massive Ponzi scheme” cannot be compelled into arbitration to collect funds the now-imprisoned Houston financier paid stockbrokers who worked for his companies.

To do otherwise, Godbey ruled in a July 30 order in the highly litigated Ralph S. Janvey v. James R. Alguire, “would frustrate a central purpose of federal equity receiverships.”

Godbey has presided over litigation involving the U.S. Securities and Exchange Commission’s civil receivership action over Stanford-related entities for more than five years. Stanford is currently serving a 110-year prison sentence after a Houston federal jury convicted him of fraud for running the Ponzi scheme. Stanford has appealed.

Early in the receivership action, Godbey appointed Ralph S. Janvey, a partner in Dallas’ Krage & Janvey, to serve as receiver over the Stanford entities to trace any assets owned by the receivership estate. Janvey then sued numerous former employees of the Stanford entities to recover the funds, but more than 100 stockbrokers filed motions to compel arbitration in the case, pointing to agreements they signed with Stanford.

The issue concerning the stockbrokers’ motions to compel arbitration has resulted in two separate trips to the Fifth Circuit and three Fifth Circuit opinions. Ultimately, the Fifth Circuit decided that Janvey had standing to assert only claims of the entities in receivership and sent the case back to Godbey for further rulings. [See "Is a Receiver Bound to Arbitration Agreement If Suing on Behalf of Creditors?," Texas Lawyer, Sept. 16, 2013, page 4.]

“There is no dispute that this issue has been back and forth an unprecedented amount of times. It’s remarkable,” Sadler said.

About Godbey, Sadler said, “He’s not defying the Fifth Circuit. He’s deciding the issue for a third time based on a new set of standards that the Fifth Circuit came up with the last time they [the Fifth Circuit] addressed the issue.”

Janvey petitioned the U.S. Supreme Court in January to address the Fifth Circuit’s standing ruling, but the high court denied his petition for writ of certiorari on June 30. The issue concerned Godbey’s denial of the stockbrokers’ motions to compel arbitration.

The consequences of enforcing the stockbrokers’ numerous arbitration agreements “are many,” Godbey wrote in the 49-page order. He noted that federal equity receiverships have been around in the United States since the late 1800s.

“This would produce a multitude of arbitrations, which would result in significant fees per arbitration,” Godbey wrote. “These arbitrations could also occur in multiple venues, which would once again increase expenses. Furthermore, multiple arbitrations in multiple venues greatly increases the likelihood of inconsistent results. …

“Large numbers of separate arbitrations would be disastrous to the Stanford receivership, and would ultimately further hurt the victims of the Stanford Ponzi scheme. The court therefore uses its discretion to deny these motions to compel arbitration.”

Kevin Sadler, a partner in the Palo Alto office of Baker Botts, represents Janvey. He’s pleased with the decision—one he’s certain will end up back at the Fifth Circuit.

“This is the third time I have won this issue,” Sadler said. “Arbitration undermines the whole purpose of what we’re trying to do here. We’re going to go back to the Fifth Circuit for a third time, but it’s obviously a very important decision by this judge,” Sadler said of Godbey.

“The arbitration agreement is the contract the schemer had with his salesmen. We have long said that it makes absolutely no sense for the receiver to be bound by contracts signed by the fraudster,” Sadler said. “It doesn’t make any sense. And the judge ruled for the first time that it doesn’t make any sense to have the receiver bound by the contracts signed by the schemer that he had with his sales force.”

Brad Foster, a partner in Andrews Kurth in Dallas, represents 115 stockbrokers who were employed by the Stanford entities and who have filed motions to compel arbitration in the case. Foster wrote in an email that he would appeal Godbey’s order to the Fifth Circuit.

“The district court’s ruling is unprecedented and contrary to established law,” Foster wrote. “We intend to file an immediate appeal.”