The Golf Channel-Ponzi Scheme

The Golf Channel recently received some bad news after the Fifth Circuit Court of Appeals issued an unfavorable decision in Ralph Janvey, as Receiver for Stanford International Bank Limited, et al., v. The Golf Channel Incorporated, Case No. 13-11305, potentially costing The Golf Channel millions of dollars.  The Fifth Circuit reversed a lower court’s decision and ordered The Golf Channel to pay approximately $5.9 million dollars to the Receiver for Stanford International.  As one would suspect, The Golf Channel was not pleased with this decision; further, this decision raises many questions about all the companies and individuals that could potentially be exposed to the same risks that The Golf Channel was exposed to.

This order to refund money previously paid to The Golf Channel came as a result of the uncovering of a multi-billion dollar Ponzi scheme that had been orchestrated by Stanford International Bank (“Stanford”) for nearly two decades.  The Golf Channel became involved with Stanford in 2006 when it contracted to provide advertising and other promotional services for Stanford over the course of a two-year period.  Before the expiration of that two year period, the parties agreed to a four year extension.  In 2009, the SEC uncovered Stanford’s Ponzi scheme and subsequently filed suit against Stanford.  Ralph Janey was appointed to serve as the Receiver, tasked with the responsibility of taking custody of assets owned or traceable to the receivership estate which included “recovering any voidable transfers made by Stanford before going into receivership.”  That’s when the receiver pulled out his driver, let the big dog eat, and went for the green, all $5.9 million of it.

The receiver filed this suit to recover the money under Texas’ unfair trade practices act which allows creditors to void previous transactions that were fraudulent and forces the transferee to return the funds received as a result of that transaction.  However, transferees cannot be forced to return a transfer when it can be shown that: (1) the transferee took the transfer in good faith; and (2) that, in return for the transfer, it gave the debtor something of ‘reasonably equivalent value.’  Ultimately, the Fifth Circuit Court of Appeals found that The Golf Channel failed to show that its advertising services provided reasonably equivalent value from the standpoint of Stanford’s creditors.  Rather, the advertising services only served to further Stanford’s fraudulent purposes.

What’s interesting about this case is that The Golf Channel had no knowledge of the fraud being perpetrated by Stanford.  The Golf Channel was described by the district court as being “more like an innocent trade creditor than a salesman perpetrating and extending the Stanford Ponzi scheme.”  Now The Golf Channel is taking quite the hit for agreeing to provide an otherwise legitimate service for another party that turned out to have orchestrated a large scale fraud.

The question now is how far could this decision reach?  Apparently, commercial time and promotional services are not considered reasonably equivalent in value to the creditors’ money, but what else would also be tossed into this category?  Furthermore, what kind of responsibility does this decision place on companies to investigate other parties before agreeing to provide potential services?  How much will one party need to know about the party’s business practices and procedures before agreeing to a contract?  Only time will tell.

Pathological Pathologist

You’ve just lost several million dollars gambling in Vegas. After thinking about how to explain this to your wife on the plane ride home, and assuming your survival after such conversation, your thoughts begin to turn on how to make up this deficit in the family budget. Although a return trip to Vegas is not immediately ruled out, your thoughts turn to filing suit against some big pockets. After Wells v. Smithkline Beecham Corp., No. 09-50244, 2010 WL 1010591 (5th Cir. March 22, 2010) [PDF], the return trip to Vegas may seem more appealing.

Wells, the Plaintiff, sued Smithkline Beecham d/b/a GSK, because he claimed that GSK’s drug Requip caused irresistable gambling urges. Wells was a pathologist who had to retire due to Parkinson’s disease. Wells was originally prescribed Mirapex to alleviate his symptoms, but he later read an article that Mirapex might cause “problem gambling.” Wells had already lost $2 million at this point. He was then prescribed Requip, which did not bear any warning about problem gambling. You can bet what happened next.

The district court granted summary judgment to GSK on causation, and the Fifth Circuit affirmed, citing Daubert. Wells put up three experts to say something like “Requip causes gambling problems.” Although Wells’ counsel was able to string together some case-specific information showing some correlation between Requip and gambling impulses, the Fifth Circuit was pretty clear:

Each of the three experts, though, conceded that there exists no scientifically reliable evidence of a cause-and-effect relationship between Requip and gambling.

Id. I imagine that the defense lawyer was somewhat bewildered when each expert admitted at deposition that there was no scientific evidence on which to base an opinion as to causation. The summary judgment motion pretty much writes itself. Without any scientific basis of opinion, the experts can’t opine in court, and, therefore, Wells claim failed for lack of proof of causation. What’s the big deal, you say? This seems pretty straightforward. Well yes, but I would point out two issues on which I will pontificate. First, Wells was just unlucky in the factual sense of the word. Based upon the Requip Patient Information [PDF] (which admittedly is an updated version that notes the potential for impulsive behaviors, including gambling) Wells could have experienced some other side effects that may or may not have been preferable. First, the warnings indicate that a patient may fall asleep during an activity of daily living, perhaps without a warning of drowsiness. Narcolepsy in Vegas could have its positives and negatives. I could envision a scenario where you’re losing at a table without the will to get up, and then you faceplant into your chips. While having a chip impaled through your forehead may hurt, at least the (figurative) bleeding would stop (maybe). I suppose there’s always the chance for somnambulistic wagering.

Second, this brings up a larger philosophical point about accrual of causes of action. While I am sure that someone has examined this in a law review article, I don’t have a lot of extra time to comb Hein Online. The Fifth Circuit makes a big deal out of “statistically significant epidemiological support.” It’s hard to study a purported disease until someone tells the scientist that they think they might have that disease or exhibits such symptoms. Then the scientist has to gather a statistically significant group to study, rule out causes, and then make a hypothesis of causation. It can take a long time to create “statistically significant epidemiological support,” longer maybe than some statutes of limitations. The court even says this:
Perhaps Requip is a cause of problem gambling, but the scientific knowledge is not yet there.

Id. There have to be some legal guinea pigs for cases involving new diseases/side effects that will likely not recover in order to establish scientific evidence that a particular drug either does or does not cause a specific side effect. Obviously we can’t wait for studies in every situation. That means that the initial plaintiffs may accrue a cause of action (reasonable notice that something is wrong with you) before there is legally significant proof of causation. What does this mean for defendants? Use Daubert early and often, before the science develops. But this does not help Wells. Maybe he can asset an equitable lien in some plaintiff’s future proceeds, if there turns out to be causation later. For now, Wells is left with the remorse that his money that he brought to Vegas stayed in Vegas.