WASHINGTON – The U.S. Supreme Court debated the reach of the federal securities laws, questioning whether investors can sue law firms and outside companies for their alleged roles in R. Allen Stanford’s $7 billion Ponzi scheme.
According to Bloomberg News, the hour-long Monday session was sprinkled with questions about home loans and prenuptial agreements, and the nine justices gave no clear indication how they will rule, directing skeptical questions at both sides.
The defendants are seeking a broad application of federal securities law – an interpretation that would thwart the Stanford suits from going forward under state law.
The case involves “classic securities fraud,” putting it under federal jurisdiction, said Elaine Goldenberg, a Justice Department lawyer.
Bloomberg notes that it tests a 1998 U.S. law enacted to prevent investors from using state courts to circumvent federal limits on class-action securities claims. Federal law prohibits punitive damages and requires higher levels of proof than many state laws. It also bars the type of “aiding and abetting” suits the investors are seeking to press in the Stanford cases.
Under the 1998 law, known as the U.S. Securities Litigation Uniform Standards Act or SLUSA, investors can’t sue under state law if the case is based on a misrepresentation made “in connection with the purchase or sale of a covered security.”
CEO R. Allen Stanford was convicted in 2012 of operating a Ponzi scheme, which cost his investors who bought certificates of deposit through his Caribbean bank. Investors said they thought the CDs were secured by safe, liquid investments.
The CDs don’t qualify as “covered” under the federal SLUSA law. That means the CDs by themselves don’t give the defendants the right to have the state-law case dismissed.
“Nobody contends that we bought anything other than noncovered assets,” the investors’ lawyer, Tom Goldstein, argued Monday.
Stanford was sentenced in June to 110 years in prison. Prosecutors said he wasted investors’ money on failing businesses, yachts and cricket tournaments and secretly borrowed as much as $2 billion from his bank.