In November, 2009, the Fifth Circuit vacated the District Court’s first preliminary injunction which froze investors’ CD accounts, holding that the investors were not properly named as “relief defendants.” See generally Janvey v. Adams, 588 F.3d 831 (5th Cir. 2009). This appeal concerned events occurring since that opinion.

After the Adams decision was rendered, the Receiver amended his complaint to name several employees and financial advisors under theories of fraudulent transfers and unjust enrichment. The Receiver then sought a preliminary injunction to allow him to continue freezing accounts containing CD sale commissions, quarterly bonuses and related compensation to employees. The employee defendants objected and, by a separate motion, sought to compel arbitration, arguing that all such disputes arose from or were related to certain promissory notes between the Stanford entities and the employees. Because the promissory notes contained mandatory arbitration clauses, the defendants argued that the dispute must be arbitrated. Without considering the merits of the arbitration motion, the District Court issued the second preliminary injunction, which is the subject of this appeal.

The issues raised on appeal by the employee defendants were: (1) whether the District Court had jurisdiction to issue a preliminary injunction while a motion to compel arbitration was pending; (2) whether the District Court abused its discretion in granting the preliminary injunction; (3) whether the preliminary injunction was overbroad; (4) whether the injunction was really an improper writ of attachment; and (5) whether the merits of the dispute were subject to arbitration. The Fifth Circuit affirmed on all points.

As to the first issue, the Court of Appeals agreed with the District Court’s decision to maintain the status quo while reserving a decision on the merits of arbitrability for another day. Said the Court of Appeals, the preliminary injunction effectively preserves the meaningfulness of any arbitration that might take place in the future.

As to the second issue—whether the Receiver satisfied the elements to obtain a preliminary injunction—the Court of Appeals focused on what facts must be alleged and demonstrated to establish a likelihood of success on the merits of fraudulent transfers. Here, the Receiver alleged that the Stanford entities were engaged in a traditional Ponzi scheme, and that all employees of SIB, SGC and other entities received proceeds from the scheme, which constitute fraudulent transfers. The defendants argued, among other things, that the allegations failed the specificity required by Federal Rule 9(b), and that the defendants could not be grouped together without distinguishing the entity employing them and the sources of their compensation.

The Court first defined the classic Ponzi scheme as a “fraudulent investment scheme in which money contributed by later investors generates artificially high dividends or returns for the original investors, whose example attracts even larger investments.” The Court further explained that a Ponzi scheme “is, as a matter of law, insolvent from its inception.”

Turning to the likelihood of success on the merits, the Court of Appeals explained that “[i]n this circuit, proving that the [transferor] operated a Ponzi scheme establishes the fraudulent intent behind the transfers it made.” (quoting SEC v. Res. Dev. Int’l, LLC, 487 F.3d 295, 301 (5th Cir. 2007) (citing Warfield v. Byron, 436 F.3d 551, 558 (5th Cir. 2006)). Because the Receiver demonstrated, through guilty pleas and declarations of insiders, that the Stanford entities operated a Ponzi scheme from their inception, the Court of Appeals held that the Receiver carried his burden of establishing the likelihood of success on the merits “thereby obviating the need to prove fraudulent intent of the transferees.” (emphasis in original).

As to whether Rule 9(b) of the Federal Rules of Civil Procedure required the Receiver to plead allegations with more specificity as to each individual defendant, the Court of Appeals explained that this was a procedural matter yet to be addressed by the District Court on the defendants’ motion to dismiss, which was still pending before the District Court. Said the Court of Appeals, “The only question that the district court had to decide on this element in the preliminary injunction proceeding was whether the Receiver had shown a substantial likelihood of ultimately succeeding on the merits, [ ] potential procedural hurdles notwithstanding. The Receiver carried this burden.” (internal citation omitted). The Court of Appeals further held that the Receiver carried his burden on the remaining elements for the preliminary injunction and, thus, the District Court did not abuse its discretion in issuing the injunction.

The third issue for appeal was the breadth of the injunction. The Court of Appeals rejected arguments over the scope of the injunction because the defendants had the burden of proving that they were entitled to the funds in the first place.

On the fourth issue, the Court of Appeals held that the District Court properly interpreted TUFTA to contemplate an injunction to prevent the disposition of fraudulently transferred assets. See Tex. Bus. & Comm. Code § 24.008(a)(3). Because the injunction did not contain words like “seizure” or “lien,” the Court of Appeals concluded that the District Court’s order was an injunction, not a writ of attachment.

Finally, both the defendants and the Receiver asked the Court of Appeals to consider the merits of the motion to compel, which the District Court had not yet decided. Because the merits of the motion had been fully brief before the District Court, and because the matter would be subject to de novo review by the Court of Appeals, the Court held that it had appellate jurisdiction to rule on the motion.

On the merits of the arbitration motion, the Court of Appeals acknowledged that the federal receiver is a legal hybrid—standing in the shoes of the company to marshal and recover its assets, while simultaneously acting on behalf of the creditors and stockholders. In this instance, it was unquestionable that the Receiver was pursuing actions under TUFTA, and that such causes of action are expressly reserved for creditors. Because the creditors were not parties to the arbitration agreement at issue, the Court of Appeals concluded that the Receiver, acting on behalf of creditors, was not bound by the mandatory arbitration agreement.

Accordingly, the Court of Appeals affirmed the preliminary injunction and remanded to the District Court to deny the motion to compel.