On March 11, 2015, the Fifth Circuit Court of Appeals, in Ralph Janvey, as Receiver for Stanford International Bank Limited, et al., v. The Golf Channel Incorporated, Case No. 13-11305, issued a stomach curdling decision requiring The Golf Channel (“Golf Channel”) to return nearly $6 million to the Receiver for Stanford International Bank, Limited (“Stanford”), which operated a now-infamous Ponzi scheme. The basis for this decision was that Stanford’s creditors could not receive value for advertising efforts intended to extend a Ponzi scheme.
There is nothing unusual about the facts in this case (other than Stanford was engaging in a massive fraud that no one knew about). In 2006, long before news of the Ponzi scheme broke, Stanford negotiated a deal with the Golf Channel regarding an advertising package. Stanford was apparently attempting to reach the Golf Channel’s high-net-worth viewership that was likely to invest. Ultimately, an agreement was struck to, among other things, provide live coverage of a golf tournament hosted by Stanford. In total, Stanford paid the Golf Channel $5.9 million.
By 2009, Stanford’s proverbial goose was cooked. The SEC uncovered a massive Ponzi scheme, one of the largest in the history of the United States. The SEC filed lawsuit in the Northern District of Texas, and the District Court appointed a Receiver to take custody of Stanford’s assets and to locate additional assets by, if possible, voiding transactions.
The Receiver targeted the Golf Channel transaction, seeking to claw back the full $5.9 million on the basis that this was a fraudulent transaction that provided no value to Stanford’s creditors. The District Court rejected the Receiver’s position, concluding that Stanford’s creditors received the market value of Golf Channel’s advertising.
The Fifth Circuit Court Appeals vociferously rejected the District Court’s ruling. The Fifth Circuit stated that the market value of the advertising is completely irrelevant. According to the Fifth Circuit, advertising purchased to extend a Ponzi scheme could not, as a matter of law, provide value to Stanford’s creditors. Thus, the Receiver was entitled to void the agreement with the Golf Channel and to a return of the full $5.9 million.
Setting aside the technicalities of the legal analysis for a moment, the decision is hard to fathom. A legitimate business partner provided a legitimate service, yet, years later it is required to pay back $5.9 million because the other party turned out to be a bad egg. What can a business do to avoid the fate of the Golf Channel? Should every business have to do a financial prostate exam of every customer that happens to be a money manager?
Worse yet, is the IT company maintaining servers at risk? Should the pizza delivery man be worried? Is the local coffee shop exposed? The scope of those potentially at risk by this decision is mind-boggling.
Bottom line, the District Court had it right when it wrote, “[the] Golf Channel looks more like an innocent trade creditor than a salesman perpetrating and extending the Stanford Ponzi scheme.”
And, as aptly put by the Golf Channel in the conclusion to its brief in support of its motion for summary judgment, the “expansive and unprecedented theory of recovery” has “the effect of rendering any payment by a fraudulent enterprise avoidable at the receiver’s sole discretion, regardless of the culpability or remoteness of the transferee from the fraud … [and] “renders meaningless the explicit protections for ‘good faith and for reasonably equivalent value’ transferees, and create[s] a chilling effect on commerce by imposing a risk of loss on vendors working in their ordinary course of business.”
Jason Hirsh is a partner in Litigation Group of Levenfeld Pearlstein, LLC, where he focuses on protecting the assets of business owners as well as institutional clients. Jason works to bring a distinct level of energy and dedication to each matter. Jason’s practice is dedicated to complex business litigation, representing clients in corporate, real estate, and…
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