MIAMI (Legal Newsline) - A lawsuit against the Securities and Exchange Commission will be allowed to proceed, a Florida federal judge said Friday.

The case involves the $7 billion dollar Ponzi scheme of Texas financier R. Allen Stanford. He was sentenced to 110 years in prison in 2008.

The plaintiffs Carlos Zelaya and George Glantz are suing alleging a claim of negligence under the Federal Tort Claims Act. They say that the SEC had received numerous complaints from 1997-2004 that Stanford was operating a Ponzi scheme but did not report this to the Securities Investor Protection Corp. even though it concluded after investigating the complaints that Stanford was operating a Ponzi scheme.

Stanford allegedly created Stanford Group Company, which primarily functioned to promote investment into the Ponzi scheme. The Stanford Group Company registered as a broker/dealer and investment adviser with the Securities and Exchange Commission and re-registered annually. The Securities and Exchange Commission allegedly received the aforementioned numerous complaints.

The judge denied the SEC's motion to dismiss with regard to the plaintiffs' claims relating to the SEC's alleged breach of its duty under federal law because it did not notify the SIPC that Stanford's company was insolvent. The plaintiffs assert that the company was insolvent because Ponzi schemes are inherently insolvent and the judge concurred.

He did however grant the dismissal that the SEC violated its fiduciary responsibilities because it allowed Stanford to annually register as a broker even though it knew he was operating a Ponzi scheme. The judge believes this was a discretionary matter for the SEC.

The government had argued that both claims should be dismissed because in both instances the SEC's "actions fall under the discretionary function exception of the FTCA. The FTCA provides a limited waiver of the Government's sovereign immunity."

Judge Robert Scola wrote, "While the determination of whether a broker/dealer is in or approaching financial difficulty is inherently discretionary, once the Securities and Exchange Commission concludes that a broker/dealer is in or approaching financial difficulty a nondiscretionary duty to report this information to the Securities Investor Protection Corporation arises. However, the Securities and Exchange Commission's treatment of an investment advisor's amendment to its Section 80b-3 registration application involves an element of judgment grounded in policy considerations, and thus falls under the discretionary function exception of the FTCA."

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