Saturday, September 23, 2023
Courthouse News Service
Saturday, September 23, 2023 | Back issues
Courthouse News Service Courthouse News Service

Pershing on Hook|in Stanford Ponzi

DALLAS (CN) - A federal judge refused to toss participation in breach of fiduciary duty claims against Pershing LLC, the clearing agent for R. Allen Stanford's $7 billion Ponzi scheme.

Lead plaintiff Lynne Turk sued the wholly owned subsidiary of Bank of New York Mellon Corp. in Federal Court in 2009.

She claimed that by providing custodian and clearing brokerage services to Houston-based broker-dealer Stanford Group Company in the sale of phony certificates of deposit, Pershing incurred liability stemming from Stanford's wrongdoing.

She alleged participation in breach of fiduciary duty, aiding and abetting violations of the Texas Securities Act, participation of aid in violating the Florida Securities Investor Protection Act and negligence.

Pershing sought dismissal, arguing it "is too far removed from the underlying wrongdoing" to be held responsible and that claims were inadequately pled.

But on Monday, U.S. District Judge David C. Godbey disagreed, and declined to dismiss the participation in breach of fiduciary duty claim.

Godbey concluded that the plaintiffs adequately pleaded the three elements required for the claim: the existence of a fiduciary relationship, Pershing's alleged knowledge of the relationship, and its alleged awareness that it was participating in the breach of duty.

"Pershing first argues it cannot be held liable because it was not aware of the Stanford entities' breaches of their fiduciary duties," the 13-page opinion states. "Yet plaintiffs make a number of allegations that, when viewed in a light most favorable to plaintiffs, support a reasonable inference that Pershing knew of the underlying fiduciary breaches."

Godbey points to the plaintiffs' allegation that Pershing knew the Stanford entities were under investigation by the U.S. Securities and Exchange Commission and that the investments "consistently" performed better than the market.

"Plaintiffs also allege Pershing had access to SGC's financial statements, which revealed that SGC was dependent on revenue from the sale of [Stanford Investment Bank] CDs, and would have been insolvent without those revenues and other capital contributions from Stanford and his entities," the opinion states. "Those allegations, in combination with allegations that Pershing consistently and for an extended period of time requested that SGC receive a reputable audit, support the inference that Pershing knew SGC was violating its duties to investors."

Godbey disagreed with Pershing's argument that its alleged contribution to the breach was not "substantial."

Pershing argued that "participation in" is similar to "aiding and abetting," a liability theory that requires "substantial assistance."

But Godbey ruled, "the court finds the distinction irrelevant here because, as previously discussed, plaintiffs allege enough facts to support a finding of 'substantial assistance.' Thus, having alleged Pershing was both aware of Stanford's underlying breach of fiduciary duties and continued to provide 'substantial assistance' to SGC, the court finds plaintiffs have adequately stated a claim for participation in breach of fiduciary duty." (Citation omitted.)

Godbey dismissed the Florida Securities Investor Protection Act claim, finding the plaintiffs did not identify any conduct qualifying as inducement under the law.

"Their complaint is based on a theory of liability applicable to Pershing as a behind-the-scenes actor in Stanford's scheme," the opinion states.

"Nowhere do plaintiffs allege that Pershing had any meaningful interfacing with Stanford investors or that it was at all active at the point of purchase of CDs."

Godbey also dismissed the plaintiffs' negligence claims, agreeing with Pershing that it owes no common law duty of care to the plaintiffs as a clearing broker.

"Plaintiffs do list a series of cases in which courts permitted claims to go forward against clearing brokers where it was alleged the clearing broker went beyond the provision of merely ministerial services," the opinion states. "However, each of plaintiffs' proffered cases pertains to the maintenance of claims based on violations of various securities laws, not on the existence of a duty of care supporting a negligence claim. In other words, there is a meaningful distinction between a clearing broker's amenability to suit for statutory violations on one hand, and the existence of an independent duty supporting a negligence claim on the other."

Allen Stanford was convicted of securities fraud in 2012 and sentenced to 110 years in federal prison.

Pershing could not be reached for comment Tuesday evening.

Based in Jersey City, N.J., Pershing handles more than $1.5 trillion in global client assets. It acts as clearing agent for more clients than any other firm, according to its web site.

Follow @davejourno
Categories / Uncategorized

Read the Top 8

Sign up for the Top 8, a roundup of the day's top stories delivered directly to your inbox Monday through Friday.