WASHINGTON - The U.S. Supreme Court ruled Wednesday that victims of former Texas tycoon R. Allen Stanford’s Ponzi scheme can go forward with class-action lawsuits against the law firms, accountants and investment companies that purportedly aided the $7.2 billion fraud.
The decision is a loss for firms that claimed federal securities law insulated them from state class-action lawsuits and sought to have the cases thrown out. But it offers another avenue for more than 21,000 of Stanford’s bilked investors to try to recover their lost savings.
The collapse of Stanford Financial Group cost Arkansas investors more than $50million in certificates of deposit, normally considered among the safest investments. Arkansans had 97 such accounts with the Little Rock office of Stanford Financial Group when it closed. Its five brokers managed about $285 million in assets in about 1,200 accounts, the Arkansas Securities Department said.
Federal law says class-action lawsuits related to securities fraud cannot be filed under state law, as these cases were. But a federal appeals court said the cases could move forward because the main part of the fraud involved certificates of deposit, not stocks and other securities.
The high court agreed in a 7-2 decision, with the two dissenting justices warning that the ruling would lead to an explosion of state class-action lawsuits.
Stanford was sentenced to 110 years in prison after being convicted of bilking investors in a $7.2 billion scheme that involved the sale of fraudulent certificates of deposits from the Stanford International Bank. They supposedly were backed by safe investments in securities issued by governments, multinational companies and international banks, but those investments did not exist.
Former investors who were blocked under federal law from seeking damages from the firms that worked with Stanford filed suit under state law in Louisiana and Texas. But the defendants claimed those suits were also blocked by the Securities Litigation Uniform Standards Act, a federal law aimed at limiting private lawsuits that allege securities fraud.
Writing for the court, Justice Stephen Breyer said the law does not preclude the class-action lawsuits because the fraud at the center of the scheme does not involve a “covered security.” Breyer said the fraud involving certificates of deposit “bears so remote a connection to the national securities market that no person actually believed he was taking an ownership position in that market.”
About an hour after Breyer read a summary of his opinion, a protester stood up near the back of the courtroom and called on the justices to overturn their 2010 ruling in Citizens United that freed corporations and labor unions from some limits on campaign spending. The court later identified the protester as Noah Newkirk of Los Angeles and said he was charged with violating a federal law prohibiting anyone from making a “harangue or oration” at the Supreme Court.
Justices Anthony Kennedy and Samuel Alito dissented in the Stanford case, warning that the majority opinion would lead to an explosion of state class-action lawsuits and frustrate the intent of securities laws designed to protect those who advise investors.
President Barack Obama’s administration had also argued against allowing the cases to move forward, saying it could interfere with the Securities and Exchange Commission’s ability to go after fraud and could weaken investor confidence.
But Breyer said the government failed to show any example of past SEC enforcement actions that would have been prevented by the court’s decision. He pointed to the government’s successful prosecution of Stanford as proof that similar frauds will continue to be within the reach of federal authorities.
Prosecutors say Stanford persuaded investors to buy certificates of deposit from his bank on the Caribbean island of Antigua. He then used the money to fund a string of failed businesses, bribe regulators and pay for his lavish lifestyle.
Many victims have been disappointed so far that they have recovered only a pittance of their initial investments during a recovery process that has dragged on for more than five years.
Business, Pages 25 on 02/27/2014