Supreme Court rules to allow class-action lawsuits against Stanford Ponzi scheme

BY Sam Hananel, Associated Press  February 26, 2014 at 11:26 AM EDT
Allen Stanford. Photo by United States Marshals Service

Allen Stanford. Photo by United States Marshals Service

WASHINGTON — The Supreme Court ruled Wednesday that class-action lawsuits from investors who lost billions in former Texas tycoon R. Allen Stanford’s massive Ponzi scheme can go forward.

The decision is a loss for individuals, law firms and investment companies that allegedly aided Stanford’s fraud and wanted the lawsuits thrown out.

Federal law says class-action suits related to securities fraud cannot be filed under state law, as these suits were. But a federal appeals court said these 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.

Stanford was sentenced to 110 years in prison after being convicted of bilking investors in a 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 hoped to win damages from the firms that worked with Stanford, but could not bring those claims under federal law. So they filed suit under state law in Louisiana and Texas. But the defendants claimed those suits are blocked by the Securities Litigation Uniform Standards Act, a federal law aimed at limiting private lawsuits that allege securities fraud.

A federal judge initially threw the lawsuits out, but the 5th U.S. Circuit Court of Appeals in New Orleans said they could move forward. The appeals court found that the investment scheme is not covered by Securities Litigation law because the main part of the fraud involved the certificates of deposit, not stocks or other securities.

Writing for the court, Justice Stephen Breyer agreed that the law does not preclude the class-action lawsuits because the fraudulent investments at the center of the scheme are not covered by the law.

Justices Anthony Kennedy and Samuel Alito dissented, warning that the majority opinion “narrows and constricts essential protection for our national securities markets.”