Victims of R. Allen Stanford's $7 billion Ponzi scheme can sue outside companies and law firms alleged to have played a role in the fraud, the U.S. Supreme Court has ruled, dealing a setback to the securities industry.
The court, voting 7-2, said the suits weren't barred by a 1998 federal law that limits the ability of investors to press litigation under plaintiff-friendly state laws.
Writing for the court, Justice Stephen Breyer said the law doesn't “interfere with state efforts to provide remedies for victims of ordinary state-law frauds.”
The two dissenting justices said the ruling would dilute investor protections under federal law and limit the Securities and Exchange Commission's authority. Mr. Breyer rejected that characterization, saying the federal government “will have the full scope of its usual powers to act.”
Under the 1998 law, known as the U.S. Securities Litigation Uniform Standards Act or SLUSA, investors can't invoke state law if the misrepresentation is made “in connection with the purchase or sale of a covered security.” Covered securities include publicly traded stocks and bonds.
Mr. Stanford sold certificates of deposit that he falsely said were backed by safe, liquid investments. The CDs themselves weren't covered by federal securities law, and the majority today said it wasn't enough that Mr. Stanford had promised to make investments that were covered.
Similar issues have arisen in suits stemming from Bernard Madoff's fraud.
The Obama administration had argued that a ruling in favor of the Stanford investors might also undercut SEC authority to enforce securities law. The Securities Exchange Act uses similar “in connection with” language, using that phrase to help define the scope of the SEC's authority.
In dissent, Justice Anthony Kennedy said the ruling “narrows and constricts essential protection for our national securities markets, protection vital for their strength and integrity.” The result, he added, “will be a lessened confidence in the market.”
Mr. Breyer said Mr. Kennedy's characterization “would be news to Allen Stanford,” who is serving a 110-year prison sentence. A federal jury convicted him in 2012 on 13 charges, including four counts of wire fraud and five of mail fraud.
“Frauds like the one here — including this fraud itself — will continue to be within the reach of federal regulation,” Mr. Breyer said.
Justice Samuel Alito joined Mr. Kennedy in dissent. Chief Justice John Roberts and Justices Antonin Scalia, Clarence Thomas, Ruth Bader Ginsburg, Sonia Sotomayor and Elena Kagan were in the majority.
Investors often want to sue in state court because federal law prohibits punitive damages and requires higher levels of proof than many state laws. Federal law also bars the type of “aiding and abetting” suits the investors are seeking to press in the Stanford cases.
Angela Shaw, founder of the Stanford Victims Coalition, said in an e-mail that the decision will let about 20,000 people seek damages.
“Allen Stanford could not have carried out his Ponzi scheme without the substantial assistance of the parties that have been sued,” Ms. Shaw said.
The defendants in the Stanford case include units of British insurance company Willis Group Holdings PLC. They are accused of writing letters that gave the investors reason to believe the CDs were backed by safe investments. The investors sued the units along with the administrator of a trust Mr. Stanford used in his scheme.
Investors are also suing two law firms, Proskauer Rose and Chadbourne & Parke, for allegedly lying to the SEC and helping Mr. Stanford evade regulatory oversight. The defendants deny wrongdoing. The lawsuits were filed under Louisiana and Texas state law.
Prosecutors said Mr. Stanford wasted investors' money on failing businesses, yachts and cricket tournaments and secretly borrowed as much as $2 billion from his bank. In a Ponzi scheme, money from the newest investors is used to fund the returns that have been promised to previous investors.