Stanford's Fraud Trial Set for 2011 as Insurance Battle Goes On

By Laurel Brubaker Calkins and Andrew M. Harris
Bloomberg News
December 18, 2009


Dec. 18 (Bloomberg) -- R. Allen Stanford's trial on charges he led a $7 billion fraud scheme will begin in January 2011 in Houston federal court, a judge ruled.

Stanford's lawyer, Kent Schaffer, had asked U.S. District Judge David Hittner not to schedule the trial until the summer of 2011. He said if defense lawyers must prepare the case without funding from Stanford's insurance policies, it could take as long as 2 1/2 years to get ready for trial.

"The criminal case is going to get under way, and it's going to go on schedule," Hittner said. "That's a solid date."

Hittner made no decision yesterday on a request from Stanford and his co-defendants to force insurer Lloyd's of London to advance them defense costs. Lloyd's is refusing to pay the defense lawyers, claiming a guilty plea entered by one former top Stanford official voided the legal liability coverage for the other accused executives.

Stanford and three of his top executives are accused of defrauding investors by paying above-market rates on allegedly bogus certificates of deposit at Antigua-based Stanford International Bank Ltd. They face parallel civil claims by the U.S. Securities and Exchange Commission, which alleges they ran a "massive" Ponzi scheme through the offshore bank.

Lloyd's lawyers called Stanford and his three co-defendants to testify at yesterday's hearing to the truth of facts alleged in the criminal indictment, the SEC complaint and a forensic accounting report completed for Stanford's court-appointed receiver.

Self-Incrimination

Stanford, Chief Investment Officer Laura Pendergest-Holt, accounting chief Gilbert Lopez and global controller Mark Kuhrt, through their attorneys, each declined to take the witness stand. They invoked their Fifth Amendment constitutional right against self incrimination.

Hittner asked Lloyd's lawyer Barry Chasnoff why he wanted to question the defendants under oath about alleged criminal acts after they already pleaded not guilty.

"If they plead the Fifth, we get an inference that the answer would be favorable to us," said Barry Chasnoff, a lawyer for Lloyd's.

Stanford must wait until January to learn if Hittner will order Lloyd's to fund his defense, under directors and officers policies that Chasnoff said are worth about $100 million.

Hittner said if he decides to require Lloyd's to pay under the policies, the insurer will have a chance to file an appeal before dispersing any funds.

Assets Frozen

Stanford and his co-defendants, whose assets have been frozen by a court order in the SEC case, say they can't afford lawyers without the Lloyd's proceeds. The defendants deny all wrongdoing in connection with charges that could imprison them for decades, if convicted.

Stanford, 59, who is in jail without bond until trial, appeared yesterday in court in green prison clothing and a close-cropped salt-and-pepper beard. Unlike previous appearances in which he remained shackled during the proceedings, Stanford wasn't in leg irons and guards freed his right arm from the handcuffs.

While the Texas financier didn't speak, he glanced often at family members packed into the first row of the gallery. Spectators included his mother and father, his fiancée, his adult daughter and a former girlfriend and her two children by Stanford.

Davis Guilty

Stanford Financial Group Chief Financial Officer James M. Davis pleaded guilty in August to three felony counts. Based on admissions in his plea agreement, attorneys for Lloyd's last month told Hittner they were no longer obligated to pay for the legal defense of the remaining executives.

Hittner told Lloyd's lawyers that Stanford and his co- defendants are charged with broader crimes and that Davis didn't technically plead guilty to a count of money laundering.

"The facts fit money laundering whether he used that term or not," Chasnoff replied. He said Lloyd's policies are written so that any allegation of money laundering is enough to deny coverage of defense costs.

Lee Shidlofsky, a lawyer representing Stanford on the insurance matter, told Hittner the court should decide whether Davis's plea and the receiver's forensic report are sufficient grounds to deny coverage. The lawyer said he could obtain affidavits from the Stanford defendants and from a competing forensic examiner that no fraudulent activity occurred at Stanford's operation. He said that should carry equal weight with the evidence Lloyd's relied upon.

Rights 'in Danger'

"While plaintiffs' constitutional rights and ability to defend themselves are in danger, the risk for underwriters is strictly economic," said the attorney, a partner at Visser Shidlofsky LLP in Austin, Texas.

Lloyd's countered that it was within its rights to exclude coverage for criminal activities.

"The D&O policy makes clear that underwriters did not intend to insure a criminal enterprise," Neel Lane, a lawyer for Lloyd's, said in Dec. 15 filing.

Shidlofsky said yesterday that if Lloyd's doesn't pay the legal fees, "it's going to fall on the taxpayers. That is a significant chunk of change to saddle taxpayers with."

The criminal case is U.S. v. Stanford, 09cr00342, and the insurance case is Laura Pendergest-Holt v. Certain Underwriters at Lloyd's, 09cv3712, both in U.S. District Court, Southern District of Texas (Houston).

The SEC case is Securities and Exchange Commission v. Stanford International Bank Ltd., 09cv00298, U.S. District Court, Northern District of Texas (Dallas).

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