U.S. District Judge Nancy Atlas said that it is more likely than not that Stanford “knowingly committed acts of money laundering” involving the use of corporate funds and that those actions should have been disclosed to investors and regulators. This violated the terms of the insurance policies and voided coverage.
“The court does not reach the issue of whether the evidence supports a finding that Stanford personally engaged in criminal conduct,” Atlas in her 45-page ruling, which followed a four-day trial in August.
Stanford and three former top executives at Houston-based Stanford Financial Group were indicted in June 2009 for allegedly swindling investors who bought certificates of deposit issued by Antigua-based Stanford International Bank Ltd.
The executives, who deny any wrongdoing, have claimed that they can’t afford to pay defense attorneys without the Lloyd’s proceeds. Their assets were frozen earlier by court order when the U.S. Securities and Exchange Commission sued them in February 2009.
Lloyd’s underwriters, after initially agreeing to honor the policies, denied coverage after former Stanford Group Chief Financial Officer James M. Davis pleaded guilty last year to mail fraud, obstructing the SEC proceeding and conspiracy to commit securities fraud.
Stanford’s criminal trial is scheduled to start on Jan. 24 before U.S. District Judge David Hittner in Houston.
“It is disappointing, but not unexpected,” Stanford’s lawyer, Robert S. Bennett of Houston, said of yesterday’s ruling in a phone interview.
Bennett, who is the fourth lawyer to head Stanford’s criminal defense team, said it was unlikely he will appeal the ruling. He said he will apply to be assigned as Stanford’s court-appointed counsel, for which he would be paid by the government to defend his client at a rate of $125 an hour.
In court filings last month, Lloyd’s said Bennett has been charging $1,000 an hour. The underwriters had paid about $14 million for the legal defense of Stanford and the other criminal case defendants through September, according to those records.
“The most important thing is that when we get to the criminal case, it is going to be on a different standard, and we’ll get to fully and completely present the evidence,” Bennett said.
Two other attorneys, Dick DeGuerin and Kent Schaffer of Houston, resigned from Stanford’s case after disputes with the financier, who was also briefly represented by a federal public defender.
Stanford, 60, who’s been in federal custody since June 2009, has repeatedly lost bids for his release. He complained that he was assaulted in prison and also argued that he can’t adequately assist in the preparation of his trial defense.
The Lloyd’s policy set forth a five-part definition of money laundering, including “the acquisition, use or possession of criminal property,” according to the ruling.
Lloyd’s lawyers asserted that the funds from Stanford bank CD purchasers, obtained by misleading the investors, were criminal property. Atlas agreed.
‘Very Stylized Definition’
“This was a very stylized definition of money laundering,” Kevin LaCroix, a directors and officers insurance consultant, said in a telephone interview. He said the Lloyd’s policy exclusion was unlike any other money laundering clause he’d seen in his 27-year career as an attorney and insurance expert.
LaCroix is the author of the D&O Diary weblog and a Beachwood, Ohio-based partner in Bloomfield, Connecticut-based OakBridge Insurance Services, which advises businesses on management liability coverage.
“It’s a highly unusual exclusion,” LaCroix said of the Lloyd’s clause, because it allowed for a civil determination of potential wrongdoing prior to the criminal trial. “It’s a very policy specific, very fact-specific determination.”
While Atlas applied a more-likely-than-not threshold of proof in the insurance case, prosecutors at the criminal trial must prove the defendants’ guilt beyond a reasonable doubt.
Houston criminal defense attorney Joel Androphy, who has been tracking Stanford’s cases, said Atlas’s determination that the financier violated money-laundering exclusions in his insurance policy will have little effect on his criminal trial or any defendant’s inclination to negotiate a plea deal.
‘Different Standard’
“That insurance case was tried to a different standard; it wasn’t even a jury’s verdict,” Androphy said in a telephone interview yesterday. “That is only the law in Judge Atlas’s courtroom. It doesn’t have to be adopted in any other courtroom.”
Jurors, the attorney said, are often more open-minded than judges. “They’ll be trying the criminal case to a jury, not a judge,” said Androphy.
Atlas yesterday refused to postpone enforcement of her order pending an appeal, which means defense lawyers won’t be paid for any further work on their clients’ behalf unless her ruling is reversed.
Lloyd’s lawyer McNeel Lane, a partner in San Antonio for Washington-based Akin, Gump, Strauss, Hauer & Feld LLP, declined to comment in an e-mail, citing his client’s policy of not discussing pending litigation.
Stanford’s former chief investment officer, Laura Pendergest-Holt, reached a settlement with Lloyd’s in August that will provide undisclosed compensation to her attorneys. Her agreement won’t be affected by yesterday’s decision.
Co-Defendants’ Coverage
The two other criminal defendants, former Stanford Chief Accounting Officer Gilbert Lopez and ex-global comptroller Mark Kuhrt, won’t be able to access the policies for their defense.
Kuhrt and Lopez knew, or should have known, that portfolio performance figures they were receiving from Davis for entry into the corporate books “were fictitious or at the very least, were not accurate reflections” of the investments’ performance, Atlas said.
Jack Zimmermann, Lopez’s criminal defense attorney who also represented Kuhrt in the insurance case, said in a telephone interview that defense lawyers are reviewing whether to appeal the ruling.
“It was an extremely unusual procedural matter where we had a civil case, with similar if not identical facts, come in before the criminal case,’’ he said. Because criminal charges are pending, “we really couldn’t put on a full case,’’ he said.
The insurance case is Laura Pendergest-Holt v. Certain Underwriters at Lloyd’s of London, 4:09-cv-03712, U.S. District Court, Southern District of Texas (Houston).
The criminal case is U.S. v. Stanford, 09-cr-00342, U.S. District Court, Southern District of Texas (Houston). The SEC case is Securities and Exchange Commission v. Stanford International Bank, 09-cv-00298, U.S. District Court, Northern District of Texas (Dallas).