Stanford Ponzi Case Will Go to Supreme Court
WASHINGTON (CN) - Investors allegedly defrauded by R. Allen Stanford's $7 billion Ponzi scheme must persuade the U.S. Supreme Court that they can use state class actions to attempt recovery.
Stanford, 62, was sentenced in August to 110 years in federal prison. He was convicted in Houston of 13 of 14 counts of conspiracy, wire fraud and mail fraud.
For nearly 15 years, Stanford Group Company and related entities sold certificates of deposit issued by its Antigua-based Stanford International Bank, and then used investor funds to cover its liabilities.
The Northern District of Texas consolidated several class actions brought under state law.
James Roland and Leah Farr led class actions that alleged violations of Louisiana law. Samuel Troice leads a group of Latin American investors who brought claims under Texas law. They sued SEI Investments, which advised the Stanford Trust Co., the bank's lawyers with Proskauer Rose and Chadbourne and Parke, and the bank's insurance brokers with Willis of Colorado.
In 2010, the federal judge presiding over the multidistrict litigation found that the Securities Litigation Uniform Standards Act (SLUSA) precluded the claims.
A three-judge panel of the 5th Circuit reversed in September 2012.
"Therefore, we find that the fraudulent schemes of the SEI defendants and the Willis defendants, as alleged by the appellants, are not more than tangentially related to the purchase or sale of covered securities and are therefore not sufficiently connected to such purchases or sales to trigger SLUSA preclusion," the ruling states.
The court noted that, whereas the claims against SEI and Willis allege misrepresentation, the claims against Proskauer solely alleged aiding and abetting, the court found.
Nevertheless, the investors alleged as their "core allegation" that, without the aid of the Proskauer defendants, "the Stanford Ponzi could not have been accomplished."
"When we examine the substance of the claims against the Proskauer defendants, it is clear that there are misrepresentations involved," the judges found." Specifically, the Proskauer defendants allegedly misrepresented to the SEC the commission's ability to exercise its oversight over Stanford and SIB. By telling the SEC that it could not investigate the operations of Stanford and SIB, the Proskauer defendants obstructed any chance of an SEC investigation uncovering the fraud, thereby allowing it to continue and harm the Troice plaintiffs to occur. These alleged misrepresentations were one level removed from the misrepresentations made by SIB or the SEI and Willis Defendants. The connection that the Proskauer defendants would have us find is that the misrepresentations to the SEC about its regulatory authority allowed SIB to recruit the Willis defendants to sell CDs, who in turn misrepresented to the Troice plaintiffs a host of things in order to convince them that the CDs were good investments, including vague references to SIB's portfolio containing instruments that might be SLUSA-covered securities. Like with the SEI and Willis defendants, the misrepresentations made by the Proskauer defendants are not more than tangentially related to the purchase or sale of covered securities and therefore, SLUSA preclusion does not apply."
On Friday, the Supreme Court consolidated petitions for certiorari from Chadbourne, Willis and Proskauer Rose.
Its review will consider just one question presented by the petition: "whether SLUSA precludes a state-law class action alleging a scheme of fraud that involves misrepresentations about transactions in SLUSA-covered securities."
The court also agreed to accept amicus curiae briefs from Breazeale, Sachse & Wilson, and DRI - The Voice of the Defense Bar.