In the Courts

In February 2015, Janvey sued Magness under the Texas Uniform Fraudulent Transfer Act in an effort to claw back the $88 million. Javney argued that Magness knew or should have known that Stanford was engaged in fraud and therefore acted in bad faith by taking out the loans. Javney obtained a partial summary judgment ruling on funds received in excess of the original investment, bringing the amount in dispute down to the original $79 million investment. But Javney failed to convince a Texas federal jury that Magness acted in bad faith. The jury determined that Magness had inquiry notice that his funds were wrapped up in a Ponzi scheme, but that he did not have actual notice. The jury further found that it would have been futile for Magness to investigate the scheme and that he acted in good faith in withdrawing the funds.

Javney appealed and a Fifth Circuit panel agreed that the failure to investigate Stanford following reports of an SEC investigation indicated a lack of good faith. Finding that Magness' knowledge prior to taking out the loans “would have excited the suspicions of a reasonable person,” the panel rejected the futility exception and ruled that since the jury found that Magness had inquiry notice of the Ponzi scheme, he could not make a good faith defense and must return the funds.

— Dennis Mahoney, Mayer Brown