What does legal malpractice have to do with a Ponzi scheme? Plenty, if a law firm helped facilitate the scheme. When that happens, the lawyers can be held responsible for investor losses.
Recently I wrote about the $7 billion Ponzi scheme perpetrated by “Sir” Allen Stanford. For a while, it looked like Stanford’s victims might only receive a penny on the dollar for their losses. While a receiver appointed by the SEC continues to struggle to find money, a well known law firm recently ponied up $35 million to settle claims oregarding its involvement with Stanford. Accused of facilitating Stanford’s scheme, Chadbourne & Parke agreed to settle those claims and avoid trial and appeals. In settling, they admitted no wrongdoing.
Chadbourne & Parke is medium size New York law firm with approximately 400 lawyers. They are well known for their finance work. In 2009, several investors in Stanford’s financial empire sued Chadbourne & Parke (“C&P”) and a second law firm, Proskauer Rose LLP. In a separate lawsuit, two other well known law firms faced similar claims, Greenberg Traurig and Hunton & Williams.
Brief History of the Stanford Ponzi Scheme
According to the lawsuit against C&P, Stanford started out his career as a fitness center owner in Mexia, Texas. He soon went bankrupt but that didn’t stop him. Between the 1980’s and his ultimate arrest in 2009, Stanford built up a financial empire by selling certificates of deposit through a group of companies and banks led by the Stanford Financial Group.
In its heyday, Stanford purportedly had $50 billion in his investment funds and served over 30,000 clients in 140 countries. Unfortunately for his investors, his financial empire was really a Ponzi scheme. Today Stanford is serving the rest of life behind bars.
The SEC and investors believe that Stanford’s scam began as early as 1988. Since that time, the government claims that Stanford played a sophisticated game of smoke and mirrors to fool both the public and regulators. Beginning in 2005, the investors say that Stanford hired Chadbourne & Parke “to help Stanford Financial evade and obstruct securities regulation and enforcement in the United States.”
Before getting into the details of the law firm’s involvement, a few more details are needed. Early in the scheme, Stanford had created an offshore bank in Montserrat, a tiny Caribbean territory with just 4,900 residents. When US and UK officials began to investigate Stanford for money laundering, Stanford shut down his operations and moved to a different small Caribbean island, Antigua.
Prosecutors and regulators say that while on Antiqua, Stanford was able to wrest control of the local government. Once he controlled the country’s financial officials, his banking scam was able to operate relatively unmolested and unimpeded. Things were so cozy that the head of the government’s Financial Services Regulatory Commission (FSRC) entered into a “Voodoo like” blood pact with Stanford. Stanford bribed his new FSRC blood brother and the agency in turn tipped off Stanford about investigations from the U.S.
Chadbourne & Parke’s Involvement
Although Stanford’s bank was licensed by Antigua, the investors claim the company was being run from Houston, Texas. They also claim that Chadbourne & Parke should have known the company was “operating an unlicensed, unregulated mutual or hedge fund directly in and from the United States.” The investors say the firm had to know what was going on since the principal attorney they assigned to the representation, Thomas Sjoblom, was a 20-year veteran of the SEC’s Enforcement Division.
Because Sjoblom knew about the massive fraud going on at Stanford probably isn’t enough to tag him or his firm with responsibilities for the investors’ losses. There is more, however. In their complaint, the investors say Sjoblom “had spent 15 years investigating fraud for the SEC and was ‘well-equipped’ to recognize the “hallmarks of fraud”; that he (Sjoblom) found SIB to be credible in all their business dealings; and that, based upon his review of the situation and personal visit to SIB, Sjoblom found SIB to be an ‘incredible institution’.” They believe that Sjoblom and C&P knew those were false statements.
The investors also claimed “upon information and belief” that C&P was involved in a scheme to “evade, hinder and obstruct” the SEC’s investigation. He also claims there was an agreement between Stanford and Sjoblom to have Sjoblom lie to the SEC.
Holding a law firm responsible for the crimes of a client is no easy task. Here, however, the investors were able to at least make detailed allegations of how Chadbourne & Parke partner Thomas Sjoblom had suborned perjury, lied and plotted to thwart and SEC investigation. (By this time, the FBI, IRS and Treasury Department were also involved in the investigation.)
Sjoblom was employed by C&P and later by Proskauer Rose. Many of the more damning allegations occurred while he was employed by Proskauer. Of particular concern to the law firms is a letter allegedly sent by Sjoblom to the SEC two days after he and his new firm Proskauer withdrew from representation. In that carefully worded letter Sjoblom “disaffirmed” all his prior representations made on behalf of Stanford. While not actually admitting to lying, the letter is in our opinion, an admission that Sjoblom knew what was up.
Ultimately in February of 2016, Chadbourne & Parke settled the case for an undisclosed sum. Later it was reported the settlement amount was $35 million. The case settled while the case was on appeal. Later in the appeal, however, the Fifth Circuit Court of Appeals tossed claims against co-defendant Proskauer Rose LLP. The court ruled that under Texas law, a lawyer is shielded from liability if the wrongdoing was done while defending a client.
Proskauer’s victory did not last long, however. A new claim against the firm has already been filed.
Collecting Ponzi Scheme Losses from Third Parties (Law Firms)
Stanford spent much of the money stolen from investors on his lavish lifestyle and on bribes. Little has been collected from him. Often in Ponzi scheme cases the only recovery is from third parties.
Lawsuits are continuing against law firms Greenberg Traurig and Hunton & Williams. The new suit against Proskauer is also pending. In addition to the C&P settlement, Stanford’s former auditor BDO Seidman has also settled by paying $40 million. There are also claims against several banks for allegedly facilitating the scheme. The named banks include TD Bank, HSBC, Société Générale, Bank of Houston and Trustmark. TD Bank and HSBC have been named in similar claims involving other money laundering or Ponzi schemes.
If you lost money in a Ponzi scheme or similar fraud, do not expect the government to collect the funds. While the Stanford case is so large that a government receiver has been appointed, receivers are the exception.
Restitution is also not usually an option. Although Stanford has been ordered to pay, he isn’t eligible for release from prison until he is well over 150 years old. In other words, he isn’t leaving alive. Even if released tomorrow, the money is long gone.
As this post points out, it is possible to recover from third parties such as banks, auditors, stockbrokers, insurance companies and yes, lawyers.
About the author, Brian Mahany is an author and fraud recovery lawyer. To date he has recovered over $100 million for his clients. For more information, contact Brian directly at or by telephone at (414) 704-6731. All inquiries are confidential.
MahanyLaw – America’s Fraud Recovery and Ponzi Scheme Lawyers