By Rob Harris, Esq.
In the shadows of the prosecution of Bernie Madoff, Allen Stanford of Stanford International Bank, Ltd, similarly was arrested and charged with operating a large ponzi scheme, defrauding investors with fictional reports of high investment returns.
In the aftermath, the courts appointed a receiver whose job was to track down assets ostensibly belonging to Stanford, which would be available for distribution to creditors. The receiver’s diligence led it to the doorstep of Golf Channel, which, by virtue of the instant opinion issued by the Fifth Circuit Court of Appeals, has been directed to disgorge $5.9 million it received from Stanford.
As the opinion explains:
“Beginning in 2005, Stanford developed a plan to increase awareness of its brand among sports audiences. It targeted this group because of its large proportion of high-net-worth individuals, the people most likely to invest with Stanford. Stanford became a title sponsor of the Stanford St. Jude’s Championship, an annual PGA Tour event held in Memphis, Tennessee. Upon hearing of Stanford’s sponsorship, The Golf Channel, Inc., which broadcasted the tournament, offered Stanford an advertising package to augment its marketing efforts. In October 2006, Stanford entered into a two-year agreement with Golf Channel for a range of marketing services including but not limited to: commercial airtime (682 commercials per year); live coverage of the Stanford St. Jude’s Championship with interspersed messaging regarding Stanford’s charitable contributions, products, and brand; display of the Stanford Logo throughout the event; promotion of Stanford as the sponsor of tournament-update segments that included video highlights every half-hour; and identification of Stanford as a sponsor of Golf Channel’s coverage of the U.S. Open (one of the four major annual golf tournaments in the world)… Stanford satisfied most of its monthly payment obligations to Golf Channel and, before the agreement expired, entered into a four-year renewal. By the time this lawsuit was initiated, Stanford had paid at least $5.9 million to Golf Channel pursuant to the agreement.”
When the receiver knocked on Golf Channel’s door, seeking return of the $5.9 million, Golf Channel responded as one would expect: “Hey, we were paid to provide advertising and marketing services, we did what we agreed to do, leave us alone.”
Seems to make sense. Except for a statute known as the Texas Uniform Fraudulent Transfer Act (TUFTA). As similar statutes in other states, TUFTA permits the recapture of transfers deemed fraudulent. But what’s fraudulent about Golf Channel receiving money to provide services?
Under the applicable law, transfers made pursuant to a Ponzi scheme are deemed to be fraudulent. Nonetheless. the recipient of the funds — in this case Golf Channel — can defeat the claim of fraudulent transfer if it demonstrates that it took the transfer in good faith (which everyone acknowledged it did) and that, “in return for the transfer, it gave the debtor something of ‘reasonably equivalent value.’”
Herein lies the problem for Golf Channel. While the services it provided may, in ordinary circumstances, have been worth $5.9 million, the test under TUFTA is whether the creditors of Stanford benefited from the services. As the court explained,
While Golf Channel’s services may have been quite valuable to the creditors of a legitimate business, they have no value to the creditors of a Ponzi scheme. Ponzi schemes by definition create greater liabilities than assets with each subsequent transaction. Each new investment in the Stanford Ponzi scheme decreased the value of the estate by creating a new liability that the insolvent business could never legitimately repay.
Because of this, under TUFTA, Golf Channel could not reap the benefit of the monies it received, to the detriment of other creditors. Thus, it was ordered to disgorge the funds, and join the other creditors as they hope to get cents on the dollar from the assets the receiver manages to collect.
Harris is the founder of http://www.golfdisputeresolution.com/