Ralph S. Janvey, a partner in Dallas' Krage & Janvey
Ralph S. Janvey, a partner in Dallas’ Krage & Janvey (Brenda Sapino Jeffreys)

Bernie Madoff and R. Allen Stanford are behind bars and out of the headlines. But lawyers tasked with cleaning up their messes hope the U.S. Supreme Court will take up a critical issue: Do federally appointed court officers have standing to sue on behalf of creditors to recover their money?

“We have two of the largest Ponzi schemes in American history, and both court-appointed officers are battling the same issue,” said Kevin Sadler, a Baker Botts partner in Palo Alto, Calif. He represents Ralph Janvey, the court-appointed receiver tasked with recovering assets invested with Stanford and his companies. Janvey is a partner in Dallas’ Krage & Janvey.

On Jan 22, Janvey filed a writ of certiorari petition in Janvey v. Alguire, a U.S. Court of Appeals for the Fifth Circuit decision. Sadler said he believes the case could speed the five-year effort to recover funds invested with Stanford, the Houston financier convicted of running one of the largest Ponzi schemes in U.S. history.

And as it just so happens, the trustee charged with recovering funds invested with Madoff—who was convicted of running the other largest Ponzi scheme in American history—has petitioned the high court asking for guidance on a similar question.

In Janvey, the Fifth Circuit dismissed an appeal of a denial of a motion to compel arbitration in a case in which Janvey sued to recover funds from numerous brokers who formerly worked for Stanford-related companies. The Fifth Circuit ruled that Janvey didn’t have standing to sue to recover those funds. [See " Is a Receiver Bound to Arbitration Agreement If Suing on Behalf of Creditors?" Texas Lawyer, Sept. 16, 2013, page 4.]

On Oct. 9, 2013, Irving Picard, a trustee appointed to recover funds invested with Madoff, filed a writ of certiorari petition in Picard v. JP Morgan Chase & Co., after a lower court rejected his attempt to sue financial institutions to recover investors’ money over a standing issue.

“We filed it because this issue of the receiver standing is the single most important issue in this receivership. It’s as simple as that,” Sadler said. “And it’s purely a coincidence that Mr. Picard is struggling with very similar issues.”

Andrew Grossman, an associate with Baker & Hostetler in Washington, D.C., represents Picard, a Baker & Hostetler partner in New York.

“You have both the Madoff trustee and the Stanford receiver raising a similar issue of standing before the court,” Grossman said. “And the court is going to have to take notice of that.”

In 2009, Madoff pleaded guilty to 11 fraud counts and was sentenced by a Southern District of New York judge to 150 years in prison. Stanford is serving a 110-year prison term after a Houston federal jury found him guilty of numerous fraud allegations in 2012.

Thomas G. Hungar, a partner in the Washington, D.C., office of Gibson, Dunn & Crutcher who represents the banks Picard is attempting to sue, declined comment. Thomas J. Moloney, a partner in the New York office of Cleary Gottlieb Steen & Hamilton, who also represents banks Picard is attempting to sue, did not return a call for comment.

Brad Foster, a partner in Andrews Kurth in Dallas who represents 115 financial advisers who were employed by the Stanford Group, including named defendant James R. Alguire, said his clients will oppose Janvey’s petition before the Supreme Court. They have until March 3 to respond to the petition.

“The Fifth Circuit’s decision was correct, and it was consistent with prior decisions of the U.S. Supreme Court and the other circuit courts of appeal,” Foster said. “The rule of law is clear. A federal receiver stands in the shoes of the debtor, and he cannot assert claims on the behalf of third-party creditors.”

If the Fifth Circuit’s decision holds, it will disrupt Janvey’s ability to recover funds, Sadler said.

“It’s our view that it’s entirely appropriate for the receiver to stand in the shoes of the creditors for the benefit of the creditors. If the receiver is not the one to bring claims to benefit creditors, then the alternative is anarchy,” said Sadler.

He said the consequence could be that each Stanford creditor might “rush to the courthouse” to file individual claims seeking the recovery of funds, “which is the opposite of what an organized receivership is supposed to be.”

Five years ago, U.S. District Judge David Godbey of Dallas appointed Janvey to locate and recover the assets that litigants allege Stanford and related entities took from them in the scheme. But many of Godbey’s rulings about the manner and method of the receivership are still pending before the Fifth Circuit. And the U.S. Supreme Court heard arguments in October in a case that will determine whether some Stanford-related defendants can be sued in a class action proceeding [See " The Slowpoke Report: Hurricane Ike, Ponzi Scheme and Border Fence Cases Swamp Judges," Texas Lawyer, Jan. 14, 2014, page 1].

“What we are hopeful is: The court has a background to look at this,” Sadler said of the most recent Stanford high court appeal in Alguire. “They know how complex it is.”