U.S. SC: Victims of Allen Stanford's $7B Ponzi scheme can sue attorneys, brokers

WASHINGTON (Legal Newsline) - The U.S. Supreme Court ruled Wednesday that investors in Allen Stanford's $7 billion Ponzi scheme can sue the attorneys and insurance brokers involved to recover their losses.

The four sets of plaintiffs filed civil class actions under state law, contending that the defendants helped Stanford and his companies perpetrate the Ponzi scheme by falsely representing that uncovered securities the plaintiffs were purchasing were backed by covered securities.

The district court dismissed each case under the Securities Litigation Uniform Standards Act of 1998.

"Although the certificates of deposit were not covered securities, the court concluded, the bank's misrepresentation that its holdings in covered securities made investments in its uncovered securities more secure provided the requisite 'connection'... between the plaintiffs' state-law actions and transactions in covered securities," the ruling states.

In a 7-2 vote, the court held that lawsuits filed in state courts can go forward.

Justice Stephen Breyer wrote that federal law does not bar the state suits from proceeding and the basic consequence of the holding is that "without limiting the federal government's prosecution power in any significant way, it will permit victims of this (and similar) frauds to recover damages under state law."

Justices Anthony Kennedy and Samuel Alito claimed the majority was weakening federal protections for future investors victimized by securities fraud in the dissenting opinion.

Kennedy wrote that the decision "narrows and constricts essential protection for our national securities markets, protection vital for their strength and integrity."

"The result will be a lessened confidence in the market, a force for instability that should otherwise be countered by the proper interpretation of federal securities laws and regulations," Kennedy added. "Though the reasons supporting the court's opinion are set forth with care and clarity, this respectful dissent submits that established principles do not support its holding."

The Ponzi scheme in the suits involved the sale of false certificates of deposit by Stanford's Antigua-based Stanford International Bank.

New York-based law firms Chadbourne & Parke and Proskauer Rose and insurance brokerage Willis Group Holdings were all sued by former Stanford investors over the Ponzi scheme.

Investors also sued financial services firm SEI Investments and insurance company Bowen, Miclette & Britt.

The Louisiana state court defendants removed their cases to federal court, and the Judicial Panel on Multi-District Litigation moved the Louisiana cases to the Northern District of Texas, where a single federal judge heard all four class actions.

The defendants in each of the cases moved to dismiss the complaints. The district court concluded that the Litigation Act required dismissal and the court recognized that the certificates of deposit themselves were not "covered securities" under the Litigation Act, for they were not "traded nationally [or] listed on a regulated national exchange."

However, each complaint in one way or another alleged that the fraud included misrepresentations that the bank maintained significant holdings in "highly marketable securities issued by stable governments [and] strong multinational companies," and that the bank's ownership of these covered securities made investments in the uncovered certificates more secure, according to the opinion.

The court concluded that this circumstance provided the requisite statutory connection between the plaintiffs' state-law fraud claims and transactions in covered securities, and the class actions were dismissed under the Litigation Act.

All four sets of plaintiffs appealed and the Fifth Circuit reversed.

The U.S. Court of Appeals for the Fifth Circuit agreed with the district court that the complaints described misrepresentations about the bank's investments in nationally traded securities. The court held that the falsehoods about the bank's holdings in covered securities were too "'tangentially related' to the 'crux' of the fraud to trigger the Litigation Act," the document states.

Stanford is currently serving a 110-year prison sentence.

U.S. Supreme Court numbers: 12-79, 12-86, 12-88