The King Can Do Wrong…in Certain Circumstances: Some ...

Fraud and Criminal Activity

The King Can Do Wrong…in Certain
Circumstances: Some Observations on the
Sovereign Immunity of Antigua in the
Stanford Financial Group Scandal

By F. R. Jenkins, Esq.,
International Lawyer,
London and Washington, D.C.

In my work representing mirror, those regulating domestic
private individuals in lawsuits sovereign immunity.
against governments and
government officials, I have Enter Allen Stanford. Most aspects
discovered that for the most of the Stanford Financial Group
part, potential claimants, even debacle have been reviewed
relatively sophisticated ones, extensively elsewhere, with one
assume they have no right to sue exception. The commentary thus far
the government. As the jurist Sir has more or less overlooked Joan Gale
William Blackstone wrote in his 18th Frank et al. v.The Commonwealth of
Century Commentaries on the Laws of Antigua and Barbuda. This is a civil
England, “That the king can do no lawsuit commenced in July 2009 in a
wrong, is a necessary and fundamental Federal District Court in Texas. The
principle of the English constitution.” case is framed as a class action. It has
There was a time, in fact, when God been brought on behalf of an
alone judged the actions of the estimated 28,000 Stanford
sovereign, and not the courts. The International Bank Ltd. (SIBL)
historians tell us, for example, that as depositors and investors hailing from
Holy Roman Emperor, Henry IV knelt 113 different countries, and seeking
in sackcloth in the snow for three USD8 billion in monetary damages
days, fasting, in order to obtain from the Commonwealth of Antigua
absolution from Pope Gregory VII. for its alleged role in the Stanford
Financial Group’s misdeeds. The
With the Protestant Reformation Complaint states: “Antigua is
and the secularisation of the state, the sovereign, but not above the law. It
supervisory role of the church became a full partner in Stanford’s
defaulted to the state itself, which fraud, and reaped enormous financial
commenced self-supervision.This benefits from the scheme.”
forced the judiciary and the legislature
in each western state to develop rules The Complaint alleges more
that abolished the absolute sovereign specifically that Leroy King, in his
immunity historically enjoyed by the capacity as the Chief Executive Officer
state, and replaced it with more of the Antigua Financial Services
limited, restrictive sovereign immunity, Regulatory Commission (FSRC), the
thereby allowing private persons to government agency with regulatory
seek legal redress against the state in oversight over SIBL, facilitated a Ponzi
certain defined circumstances. In each scheme that was based upon
western state, two sets of rules investment in fraudulent Certificates
emerged – one set applicable to the of Deposit (CDs) issued by SIBL. He
domestic sovereign where the court is said to have ensured that FSRC
or legislature making the rules was “looked the other way” by failing to
sitting, and another set applicable to conduct sham audits and examinations
foreign sovereigns in foreign states. of SIBL books and records, failing to
The rules of sovereign immunity vary examine the SIBL investment portfolio
widely from state to state, however, that was meant to back the high yield
within a given state, the rules CDs issued by SIBL, and providing
regulating foreign sovereign immunity SIBL with access to FSRC’s
track, even if they do not precisely confidential regulatory files. The
FSRC allegedly knew that

OI 207 • June 2010 19

Fraud and Criminal Activity representations made by SIBL and individual aircraft owned by Stanford words, not commercial acts of a
others in the Stanford Financial Group on favourable terms. Antigua private nature, but rather non-
to customers and regulators in other partnered with Stanford in the commercial, public or governmental
countries, including the US Securities construction of the Mount St. John acts. The case law in this area is
and Exchange Commission, were false Medical Centre, and as part of the convoluted and conflicts.
and misleading1, assisted in the arrangement received a USD30 million
concealment of these false and loan from Stanford to cover the One line of cases applies a
misleading statements, and construction costs, which Antigua “nature” of the act test. The test is
misrepresented to depositors and promised to repay using funds taken meant to be an objective inquiry into
investors that it had performed certain directly from Antigua’s social security whether a private, ordinary person
audits of SIBL and its financial system. Stanford underwrote the could have performed the act in
statements, which in fact, it had not construction of executive offices for question. If so, then the act must be
performed. Importantly, for the Antiguan government officials and jure gestionis, private, and jurisdiction
purposes of sovereign immunity employees. Stanford donated money is available; if not, and the act is one
analysis, the FSRC, created by and to build a national library…and so on, that only a public authority could
under the Antigua International and so forth2. perform (such as legislating,
Business Companies Act, is said to be adjudicating or providing national
an agency or instrumentality of What of Antigua’s sovereign defence) then the act must be jure
Antigua, so that Antigua itself is immunity from the jurisdiction of US imperii, public, and jurisdiction is not
deemed to have acted in the Stanford courts? The Frank plaintiffs have available. The test has limited utility in
affair by and through the FSRC, and is invoked various sections of the the modern world, where, for
charged with crucial information and Foreign Sovereign Immunities Act, the example, national defence and military
knowledge in the possession of FSRC. US federal legislation that provides the actions can be and increasingly
limited, defined statutory exceptions frequently are undertaken by private
Historically, Antigua has derived to the immunity of foreign states from contractors like Blackwater, and where
over half of its gross domestic product the jurisdiction of US courts. The private parties frequently contract for
from tourism. But in the 1990s most important of these sections is private dispute resolution mechanisms
hurricanes ravaged its tourism known as the “Commercial Activities such as the International Chamber of
infrastructure, and then the global Exception”3 and it provides: Commerce mediation or arbitration4.
financial slowdown further reduced In the Frank case, Antigua could argue
the number of tourist visitors and (a) A foreign state shall not be immune from that the fulcrum of all of its activity
tourism revenues to Antigua. The was the FSRC, a regulatory agency, and
Complaint alleges that, unable to the jurisdiction of courts of the United regulation is a quintessentially public
attract legitimate sources of act. There may have been regulatory
investment and counterparty States or of the States in any case - … failure, but that is not in “nature” a
relationships, Antigua turned to Allen private act. The plaintiffs could
Stanford and the Stanford Financial (2) in which the action is based upon a counter that there were direct
Group. “Antigua therefore entered dealings between the Stanford
into a corrupt and illegal partnership commercial activity carried on in the Financial Group and other elements of
with the Stanford Co-Conspirators, in the Antiguan government for the
which Antigua became an integral part United States by the foreign state; or upon purpose of promoting Antiguan
of, and beneficiary of, Stanford’s multi- tourism and commerce, and that these
billion dollar international fraudulent an act performed in the United States in dealings certainly were not ones that
conspiracy.” only a public authority could perform.
connection with a commercial activity of
USD36 million in unauthorised A conflicting line of cases applies a
SIBL personal loans to Allen Stanford the foreign state elsewhere; or upon an “purpose” test. Under this test, an act
were used to subsidise Antigua’s is classified as being private or public
annual 20-20 cricket tournament, a act outside the territory of the United according to whether it serves a
major international marketing and private or public purpose5. As one
tourism event for Antigua. SIBL also States in connection with a commercial commentator has noted, the “purpose”
made an investment of USD63.5 test has spawned its own set of
million in undeveloped Antiguan activity of the foreign state elsewhere and complexities: “[a]rguably a state’s
property. Stanford also made a direct contract is immune if it serves a public
loan of USD85 million to Antigua, that act causes a direct effect in the purpose, and a state’s legislative act is
which Antigua used, inter alia to pay not immune if it is intended to have
the salaries of Antiguan government United States… commercial effect.” There is also the
employees and to fund their pensions. In support of their access of the problem that, regardless of the way in
Stanford and Antigua joint ventured Commercial Activities Exception to which a state structures its activity,
the expansion and development of the Antigua’s sovereign immunity, the Frank the activity can always be said to be
V. C. Bird International Airport in an plaintiffs argue that Antigua’s acts in for a public purpose since a state is
arrangement that gave Stanford “near furtherance of the Stanford Ponzi doing it6. In the Frank case, Antigua
total control” over the country’s scheme occurred outside of the could argue that all of its actions in
airport. The development included the United States, and caused direct connection with Stanford were for the
creation of two restaurants, a stadium effects inside the United States. The public purpose of developing the
and offices near the airport. Leeward direct effects include (i) the sale to US Antiguan economy. Individual
Islands Air Transport Services, a citizens of the fraudulent SIBL CDs, decisions and actions may have been ill
company majority owned by Antigua, and their subsequent financial loss (US considered, but all were taken as a last
used funding made available by investors represent the largest resort for the greater public purpose
Stanford to purchase Caribbean Star investor group by nationality), (ii) the of developing the Antiguan economy
Airlines (a Stanford company) and unsatisfied claims of the US Internal and pulling it out of the economic
Revenue Service for millions of dollars
in taxes, interest and penalties, (iii) the
collapse of certain businesses in the
US and (iv) resulting criminal
investigations and litigation in the US.
Antigua has not yet responded to
the assertion by the US court of
jurisdiction over it, a foreign
sovereign, in the Frank litigation.
When it does, it may be expected to
challenge the assertion of jurisdiction
on the basis that its acts were jure
imperii, not jure gestionis, in other

20 offshoreinvestment.com

slump caused by the hurricanes and global financial woes. Fraud and Criminal Activity
The plaintiffs might counter that there cannot possibly
be a public purpose when all of the dealings were only 21
possible in the first place as a result of regulatory failure
and the criminal acts of government officials, including
inter alia the misappropriation of social security funds.

Ultimately, it is not possible to anticipate the
outcome of these and other likely legal arguments in
advance of their actual adjudication. It is possible,
however, to draw a few systemic lessons from the
Antiguan quagmire. First, any international financial
centre that grows overly dependent on one, two or a
limited number of powerful financial interests is making
itself vulnerable to the kinds of arguments made by the
Frank plaintiffs. In these circumstances, it will be easier
for plaintiffs to argue that the offshore jurisdiction is not
merely a host of the commercial activity of others, but
has crossed the line and has become a participant for
profit in its own right. Secondly, the international
financial centres cannot legislate their own immunity
from the jurisdiction of courts in the home countries of
fraud victims. Offshore jurisdictions typically include in
their offshore legislation clauses that purport to
immunise the financial regulator and the jurisdiction itself
from liability for the claims of investors, depositors and
others transacting with the financial institutions they
regulate. There may be a choice of law argument or
defence based on such clauses, but before that can be
raised, the offshore jurisdiction will have to endure
lengthy and costly litigation in US courts over
jurisdictional issues, and very damaging publicity as all of
the facts are aired. Finally, financial regulators must be
insulated from political pressures if they are to have and
exercise the kind of regulatory independence that can
prevent Stanford-like Ponzi schemes from developing in
the first place.

It is grotesquely ironic that Stanford and Antigua
chose the game of cricket as their marketing edge.
Cricket, with its many rules and gentle customs, has
always been used as a symbol of fair play and honest
dealing in commercial matters. It may have been exciting
while this particular game lasted, but Antigua will spend
years and a fortune trying to overcome the damage done
to its reputation and economy by the Stanford scandal.

END NOTES:
1. For example, FSRC allegedly knew that whereas SIBL had

represented to its depositors and investors that (i) the portfolio of
assets backing the deposits and CDs consisted of well-diversified,
marketable securities managed by professional third parties, when
in fact more than half of the portfolio was invested in undisclosed
“private equity real estate” and a substantial part of the remaining
portfolio consisted of investments in speculative, unprofitable
businesses controlled by Stanford, and (ii) SIBL did not engage in
risky lending activity, when in fact it had made more than USD1.6
billion in undisclosed and unsecured personal loans to Allen
Stanford.
2.The allegations concerning Antigua’s alleged wrongdoing contained
in the preceding paragraphs and throughout this article have been
extracted from the Complaint filed in the Frank case, and are not
the allegations of the author of this article.
3. 28 U.S.C. § 1605(a)(2).
4. H. Lauterpacht,The Problem of Jurisdictional Immunities of Foreign
States, 28 Brit.Y. B. Int’l. L. 220, 222-26 (1951); J.W. Dellapenna,
Suing Foreign Governments and Their Corporations, p. 360
(Transnational Publishers, Inc., 2d Ed., 2003).
5. Roumania v. Guaranty Trust Co., 250 F. 341 (2d Cir.), cert denied,
246 U.S. 663 (1918).
6. Dellapenna, at p. 361.

OI 207 • June 2010