NEW ORLEANS, USA -- The US Fifth Circuit Court of Appeals has held that the Foreign Sovereign Immunities Act (FSIA) bars Stanford International Bank Ltd (SIBL) Ponzi scheme victims from bringing a claim against Antigua and Barbuda, a foreign state. The decision reversed a ruling by the US District Court for the Northern District of Texas.
The Stanford victims successfully argued in the trial court that the commercial activity exception allowed civil suits brought by them, as well as the argument that Antigua and Barbuda had waived sovereign immunity, but the Fifth Circuit disagreed, reversing the lower court decision, on both issues.
The consolidated cases were based on Antigua and Barbuda’s alleged involvement with the Stanford Ponzi scheme.
The convicted perpetrator of the fraud, Allen Stanford, owned and operated multiple financial entities, including the SIBL, which was an offshore bank located in Antigua and Barbuda. Through these entities, Stanford sold certificates of deposit (CDs) to investors, promising exceptionally high rates of return. Most of the funds raised from the sale of these CDs were never invested, as promised, but were used to pay back other investors in the scheme.
When the scheme collapsed in 2009, Stanford had sold over $7 billion in fraudulent CDs. Stanford was subsequently convicted of multiple federal crimes and was sentenced to 110 years’ imprisonment.
The primary allegation in the lawsuits is that Antigua and Barbuda acted as an active and willing participant in Stanford’s scheme and knowingly provided Stanford and his businesses a safe harbour from regulatory scrutiny. Plaintiffs in both suits allege that Stanford and Antigua engaged in a quid pro quo relationship in which Stanford provided Antigua financial incentives to encourage and ensure its involvement in his scheme by bribing public officials and providing loans to Antigua, which were never repaid.
Specifically, the plaintiffs alleged that the “loans were merely a way to transfer the proceeds of the Ponzi scheme to Antigua”. In exchange for the loans, they alleged that “Antigua assisted Stanford by conferring legitimacy on the fraudulent enterprise and on Stanford himself, providing assurance to investors that the activities of SIBL and Stanford were legitimate and subject to regulatory authority”.
The plaintiffs contended that, as part of its involvement in the Ponzi scheme, Antigua and Barbuda allowed Stanford undue influence over the regulations his organizations would be subject to. They also allege that Stanford exerted undue influence over the individuals charged with ensuring that he and his organizations were in compliance with the relevant regulations.
Crucial to Antigua and Barbuda’s alleged involvement with Stanford’s scheme was the Financial Services Regulatory Commission of Antigua (FSRC) and Leroy King, the FSRC’s administrator and chief executive officer, who were tasked with regulating SIBL. The plaintiffs alleged that Stanford bribed King in order to allow SIBL to escape regulatory scrutiny from the FSRC.
As a foreign nation, Antigua and Barbuda challenged the district court’s jurisdiction in each suit under the FSIA. The district court determined that it had jurisdiction over the suits under both the commercial activity and waiver exceptions of the FSIA. Antigua and Barbuda appealed these rulings.
Antigua and Barbuda did not, however, contest the application of the so-called commercial activity exception in relation to a claim brought by the Official Stanford Investors Committee (OSIC), which provides that a foreign state is not immune from suit in the United States when “ the action is based... upon an act outside the territory of the United States  in connection with a commercial activity of the foreign state elsewhere and  that act causes a direct effect in the United States”.
OSIC argued that Antigua and Barbuda had waived sovereign immunity in two loan agreements it entered into with Stanford. The agreement for the first of the loans, referred to as the “$40 million loan”, was provided to Antigua to “pay salaries and for other discretionary purposes”. The second loan, referred to as the “$31 million loan”, was provided to Antigua and Barbuda by Stanford to build a hospital.
The district court found that provisions of both loan agreements explicitly waived sovereign immunity for OSIC’s contract claims based on either loan.
The complete text of the reported decision may be found here