(Reuters) - A lawsuit claiming U.S. securities regulators were negligent in failing to respond earlier to Allen Stanford's $7 billion Ponzi scheme can go forward for now, a federal judge ruled in Florida on Friday.
U.S. District Judge Robert Scola rejected the U.S. government's motion to dismiss the case, according to court documents. The government claimed the court did not have jurisdiction over the U.S. Securities and Exchange Commission's handling of the Stanford case.
The purported class action complaint, filed by two investors who say they lost a combined $1.65 million when the scheme collapsed, claims the SEC knew as early as 1997 that Stanford was likely operating a Ponzi scheme but took no action against him until 2009. The SEC had a duty to notify the Securities Investor Protection Corp (SIPC) of Stanford's fraud, the lawsuit asserts.
The SIPC, funded by the brokerage industry, handles investors' claims when brokers fail and has overseen liquidation proceedings for Bernard Madoff's Ponzi scheme and the collapse of MF Global.
In his ruling, Scola found that the SEC was required to act if it concluded that Stanford was running a Ponzi scheme.
"When the Securities and Exchange Commission believes that a broker or dealer is in or approaching financial difficulty then it must report that broker/dealer to the Securities Investor Protection Corporation," he wrote.
Scola did, however, dismiss the lawsuit's second claim, which faulted the SEC for not considering whether to deny Stanford's company's annual registration as an investment advisor. The judge agreed with the government's argument that such decisions are entirely within the SEC's discretion.
The government's argument that the SEC did not know Stanford was running a Ponzi scheme will be addressed if and when it moves for summary judgment, the judge said.
A similar $18.7 million lawsuit against the U.S. was tossed by a Texas federal judge last year for lack of jurisdiction.
In a March 2010 report, the SEC's inspector general found the SEC was aware since 1997 that Stanford was likely running a Ponzi scheme and that numerous agencies, including the Federal Bureau of Investigation, the Justice Department and the Secret Service, all probed Stanford's operations at one time or another.
An SEC spokeswoman declined to comment on Friday's ruling.
"This is a historic ruling showing that the SEC can finally be held accountable for not notifying SIPC," said Gaytri Kachroo, a lawyer for the plaintiffs.
Stanford was sentenced in June to 110 years in prison for bilking investors with fraudulent CDs issued by Stanford International Bank, his bank in Antigua.
The plaintiffs are seeking unspecified damages and certification of the class action.
The case is Zelaya et al. v. United States, U.S. District Court for the Southern District of Florida, No. 11-62644.
(Reporting by Joseph Ax; editing by Carol Bishopric)
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