 By Nancy Stein The financial scandals continue to unfold, from Bernard Madoff’s Ponzi scheme that lasted for decades to Allen Stanford’s international investment fraud with global implications. Thomas Ajamie, the founding partner of Ajamie LLP in Houston, has taken on the financial and investment company giants on behalf of his clients in high-profile cases throughout the world. Ajamie has handled a broad range of groundbreaking securities, financial and international cross-border cases obtaining multi-million dollar verdicts and settlements for his defrauded clients, including a $429-million arbitration award against a PaineWebber broker. Now he’s taking up the cause for investors defrauded by Madoff and Stanford. Ajamie, a Lawdragon 500 honoree, recently talked to Lawdragon about investor fraud, the scope and complexity of multi-national financial institution litigation, the implications for investors worldwide and the likelihood of recoveries in the Madoff and Stanford cases. Lawdragon: Investment fraud is becoming so widespread. The latest cases of Madoff and Stanford involve billions on a global scale. Do you expect there to be more of these types of schemes coming to light? Thomas Ajamie: Yes. More of these frauds will be revealed. When money becomes tight, the frauds are exposed. This is when the rubber hits the road. For years, investors have been comfortable and perhaps trusted that their money was safe and secure. But now, in a bad economy, investors are anxious. Whether they need access to their money because they’ve lost their job, or because they are simply afraid, customers are showing up at the banks and finding out that their money isn’t there. LD: Tell me about the cases you’ve handled in the past involving securities fraud. TA: I was handling financial fraud cases in the 1990s when no one else was handling them. Colleagues thought that I was crazy to actually accuse these brokerage firms of fraud. After all, these were supposedly blue chip firms—how could there be fraud in these prestigious institutions? People said “you’ll never show fraud,” but I proved them wrong. I’ve won cases against PaineWebber, UBS, J.P. Morgan Chase and Lehman Brothers and others. These firms paid my clients tens of millions of dollars to compensate for their fraudulent actions. LD: How do the Madoff and Stanford cases compare to the cases you’ve handled in the past? Are you surprised by their magnitude? TA: For me this is par for the course. I am not the least bit surprised at the magnitude of these frauds, but find it sad that a hedge fund fraud exposed in Florida a few weeks ago was described as involving a “mere” $500 million. These frauds have affected thousands of people’s lives—maybe destroyed thousands of lives—and now we consider a $500 million fraud to be small? The reality is that even a $10 million fraud, when it involves you, your family and friends, is huge. LD: How about the implications in Texas? So many people have been hurt—from Stanford employees to investors. TA: The ramifications from these frauds are not limited to Texas, or the United States. They’re global. I travel to and have clients all over the world. I have handled cases out of Hong Kong, France, Ecuador, Argentina, Mexico, Thailand, and Indonesia. When the Madoff story first broke, I received calls from colleagues in Switzerland, saying “Tom, this is going to hit Switzerland hard.” And at the time, I just didn’t recognize how. Now we know. The Madoff fraud severely hit Geneva and other parts of Switzerland through feeder funds. It has affected investors in European and Latin American countries, as well as other foreign “countries” like Texas. LD: What about the basis for the claims and sources of recovery? TA: Recovery will be very difficult in the Madoff fraud unless an intermediary party is involved. Feeder funds or funds of funds claim an expertise in selecting the right hedge funds or investment managers. They have a role and they charge a fee for it. So if an investor went to an intermediary fund for these services, and the intermediary fund took the money and said “Hey, we’re going to invest with this guy named Madoff. Don’t worry we’ve done our due diligence,” that intermediary fund has liability. Those intermediary funds are potential defendants and many of them have been sued already, especially here in New York. Now in the Stanford fraud, CDs with an offshore bank are at issue. They are not FDIC insured—that’s the scary part. LD: There will certainly be international implications and enforcement of judgment issues. Would you share your thoughts on that? TA: No question about it—the international aspects add to the complexity. These issues can be litigated for years because there are so many different laws at play. With Stanford, the law of Antigua will be implicated, as well as laws in the United States. Stanford had banks in Texas and in other states, and all of those laws will come into play. And Stanford has banks in other countries as well. So we will see multiple jurisdictions—multiple countries—fighting to take over this receivership, and the laws of those different countries will apply. LD: In the Madoff case there is some insurance protection and regulation—but is there any such protection and U.S. regulatory framework applicable for Stanford investors? TA: It appears that there isn’t any protection on the CD side, but Stanford also has a money management side and broker-dealer operations. The SEC has jurisdiction over the broker-dealer operations and has stepped in to investigate. Some of the Stanford CDs were sold through its broker-dealer arm, just as if they had been sold through Merrill Lynch. So if Stanford’s broker-dealer arm, which is registered in the United States, sold fraudulent CDs, the SEC can prosecute. But what’s troubling to me is that neither the FDIC nor the Office of the Comptroller of the Currency—two other regulators that regulate ordinary banks like Citibank and Wells Fargo—have no jurisdiction here since Stanford is a foreign bank. In fact, the whole thing is very deceitful. In Houston, R. Allen Stanford has a huge building—Stanford Financial. Stanford advertised and went out and solicited people. By all appearances, Stanford’s operation was a regular U.S. bank. It had a U.S. presence and an office, and customers could go there to make deposits and buy CDs. I have no doubt that the people who put their money there had no idea that Stanford was not subject to U.S. regulation. LD: Where can we expect all this to play out in the Stanford case? Overseas? Will the investors be able to bring their claims here in the U.S.? TA: Oh, yes, they can bring their claims here. But there are going to be fights in different jurisdictions. This is going to be extremely messy and it’s going to go on for a long time. It’s a shame because investors’ accounts have been frozen. We’ve had people come to us saying that all of their money is in Stanford. They have automatic withdrawals set up on their accounts to pay their home mortgages and children’s tuition, and those accounts are frozen. They’re asking us how they are going to pay their mortgages and tuitions. LD: Who exactly are you representing? TA: I can share that in a broad sense. I can’t reveal names, of course, without receiving permission from our clients. But we’re representing individuals from varying levels of income and wealth. In this particular case, we are receiving calls, en masse, from people saying that they had anywhere from $200,000 to $40 million on deposit with Stanford. LD: How about the extent of claims against Stanford? TA: Right now the SEC is focusing on about $8 billion. Stanford has always held out that it is a $50 billion institution (which makes it a very large bank); however, I don’t know if that number is accurate. There’s been an uproar in Venezuela because so many Venezuelans had accounts with Stanford. Customers have petitioned the government for intervention, but the Venezuelan government says it is not going to intervene. It has risen to that level, where a government has made an official announcement about whether it is going to help Stanford depositors. Just like Madoff, Stanford’s fallout is being felt worldwide. LD: Where will Stanford investor recovery come from in light of the absence of any insurance coverage? TA: That’s a good question. I think Madoff investors are more likely to obtain recovery. In Stanford it will be much more difficult. I don’t know the answer right now. Stanford is very different from Madoff. I’ve read that Madoff didn’t purchase securities for something like 15 years. We have to approach the Stanford investigation methodically, and the first step is to determine what money is there and what money isn’t there. I’ve seen Stanford account statements showing that some money was actually sent to other institutions, and very well may be in accounts outside of Stanford. So far, at least, those accounts have not been implicated. What has been implicated is Stanford’s banking side, including the certificates of deposits and the money kept in-house at Stanford. LD: This is going to be a discovery nightmare. TA: It is going to be an absolute discovery and accounting nightmare because of the different jurisdictions involved and the fight over who has primacy. The Antiguan authorities are already claiming that they have primary jurisdiction and they are angry at the United States federal judge for having appointed a U.S. receiver. Antigua is saying that the U.S. doesn’t have jurisdiction over this issue because this is an Antiguan bank, not a United States bank. LD: Will the case have to be resolved in a foreign jurisdiction? If so where? TA: Right now we are trying to trace funds. We’re just talking right now about the jurisdictions where the bank is located but that doesn’t mean that’s where the funds are kept. As you know, you can transfer funds in a heartbeat—with the click of a mouse—from jurisdiction to jurisdiction. We have no idea if the funds are on deposit in Antigua or if they’ve been wire transferred to accounts in Switzerland, Singapore, the Philippines or elsewhere. No one knows. And these will all be possible jurisdictions for litigation. Countries all over the world are possible repositories for the funds, and we will see fights over which law applies. LD: Is there any way around government immunity to address the SEC’s failure to uncover the problems despite warnings? How about its duty to warn investors when problems were discovered? TA: No. Government immunity applies. It’s simply sad but true. LD: What are your thoughts on the obvious regulatory failures? TA: We have the regulatory framework and we have the regulations in place. We have the enforcement entities. Unfortunately, though, we have bureaucrats who have become extremely cozy with the industry and are—quite frankly—lazy. They don’t have a zeal for prosecuting. I would want zealous—almost fanatical—former prosecutors who would prosecute if even one penny of my money was missing. These agencies are supposed to be protecting our money. We have to rely on our government, the SEC, the OCC, and the FDIC for insurance purposes, and other regulatory agencies. But if they don’t work, they don’t work. Our system can become useless, as in Venezuela in the last decade, where bank failures and repeated runs by depositors were endemic in that country’s economic crisis. During that meltdown, many Venezuelan bank employees sucked money out the banks and left the country. LD: How can investors protect themselves in light of the poor job the government is doing regulating these institutions? TA: If you can’t trust the banks and you can’t rely on the government to protect you, you have to protect yourself. Then your protection is the safe deposit box or burying it in the ground. We lack the power or right to go in and audit the institutions and see our money to make sure it’s really there. LD: What will be the greatest challenge facing investors in terms of obtaining recoveries? Uncovering assets? Determining the losses? It’s different than market investments since there CDs were supposed to pay out at a set return rate. TA: It’s always difficult in fraud cases. If con artists have stolen the funds or lost them through poor investments, then the money is gone. There’s no where to go to recover it. The greatest challenge is knowing where to go to find the money. Uncovering assets and determining the losses will be huge challenges. Some people will not recover anything if 98% of the funds have either been spent or lost. LD: How are you proceeding in these cases? TA: The first step we are taking for our clients is to work with the receiver to release the funds that aren’t subject to the alleged fraud so that people can get their money and go back to their lives. So far what’s been implicated by the SEC is the $8 billion in CDs, but that leaves $42 billion that may be in managed accounts or other types of accounts that may not have been part of any type of fraud. Unfortunately, at the present time all $50 billion of the funds are frozen. LD: So what lessons and advice can you share with us? TA: Don’t put all your money in one institution. Spread your money among four or five institutions because you just don’t know what’s going to happen. It doesn’t matter how large the institution is. In fact, we are finding that the largest ones may be vulnerable because it is impossible to manage these worldwide institutions. We’re not able to regulate them and we’re not able to supervise them. We are seeing completely ineffective compliance programs in these worldwide institutions. That is why diversification is so important. The fact that a company has been reviewed by the SEC doesn’t seem to mean anything. Enron was audited by the SEC shortly before it collapsed. Madoff was audited by the SEC seven or eight times and it’s a massive fraud. So never take comfort in knowing that some bureaucrat is auditing a company. Page: 1 of 1 pages for this article
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