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.