By Lawrence Hurley
WASHINGTON Feb 26 Investors in Allen Stanford's
$7 billion Ponzi scheme can sue to recoup losses from lawyers,
insurance brokers and others who worked with the convicted
swindler, the U.S. Supreme Court ruled on Wednesday.
On a 7-2 vote, the court held that lawsuits filed in state
courts can go forward. The majority said the ruling would not
affect the U.S. Securities and Exchange Commission's (SEC)
ability to enforce securities law as some had feared.
Stanford's fraud involved the sale of bogus certificates of
deposit by his Antigua-based Stanford International Bank. He is
serving a 110-year prison sentence.
New York-based law firms Chadbourne & Parke LLP and
Proskauer Rose LLP and insurance brokerage Willis Group Holdings
Plc were sued by former Stanford investors. The
investors also sued financial services firm SEI Investments Co
and insurance company Bowen, Miclette & Britt.
"It's clear the justices understood that ruling for the
defendants would create an immunity that Congress never
imagined," said Tom Goldstein, a lawyer representing the former
Representatives from the two law firms said that when the
case returns to the lower court the defendants would move to
dismiss the suit on other grounds.
Writing for the majority, Justice Stephen Breyer said the
Securities Litigation Uniform Standards Act (SLUSA) did not
prevent the state lawsuits from proceeding. The law says that
state lawsuits are barred when the alleged misrepresentations
are "in connection with" the purchase or sale of a covered
security, which is defined as a security listed on a national
exchange at the time the alleged unlawful conduct occurred.
As the defendants in the case were not selling securities
traded on U.S. exchanges, "it is difficult to see why the
federal securities laws would be - or should be - concerned with
shielding such entities from lawsuits," Breyer wrote.
IMPACT ON SEC
The Obama administration, representing the SEC, had sided
with the defendants to try to protect the agency's authority to
pursue wide-ranging investigations.
The administration said the "in connection with" language in
SLUSA that limits state court lawsuits mirrors language in
federal law that gives broad authority of the SEC to pursue such
Justice Anthony Kennedy wrote in a dissenting opinion that
the ruling would have a negative impact on the SEC because it
"casts doubt on the applicability of federal securities law to
cases of serious securities fraud." Kennedy was joined in
dissent by Justice Samuel Alito.
Securities law experts backed the majority's view that the
ruling was relatively narrow.
Donald Langevoort, a professor of law at Georgetown
University, said he was "very surprised" the SEC tried to argue
that a ruling in favor of the plaintiffs could diminish the
government's enforcement powers.
"The opinion is imminently correct as a matter of common
sense and legal policy," Langevoort said.
Charles Smith, of the law firm Skadden, Arps, Slate, Meagher
& Flom LLP who represents clients before the SEC, said the
agency would be comforted by the limited scope of the ruling.
"The decision is crafted in a way that is intended not to
interfere with the SEC's enforcement authority," he said.
The SEC, via a spokesman, declined to comment.
The defendants had sought Supreme Court review after the New
Orleans-based 5th U.S. Circuit Court of Appeals in March 2012
said the lawsuits brought under state laws by the former
Stanford clients could go ahead.
The former Stanford clients are keen to pursue state law
claims because the Supreme Court previously held that similar
"aiding and abetting" claims cannot be made under federal law.
The class-action lawsuits filed by the former investors
accused Thomas Sjoblom, a lawyer who worked at both law firms,
of obstructing a SEC probe into Stanford, and sought to hold the
other defendants responsible as well.
The cases are Chadbourne & Parke LLP v. Troice et al, U.S.
Supreme Court. No. 12-79; Willis of Colorado Inc et al v. Troice
et al, U.S. Supreme Court, No. 12-86; and Proskauer Rose LLP v.
Troice et al, U.S. Supreme Court, No. 12-88.