For years federal law enforcers ignored warnings about R. Allen Stanford's $7 billion fraud, but don't expect government officials to suffer any penalty. Instead, plaintiffs lawyers are seeking to use Stanford's crimes as a pretext to launch class-action lawsuits against other people and businesses.
Now the Supreme Court will decide whether to let them. The question at oral argument this week in Chadbourne & Parke LLP v. Troice was whether state class-action lawsuits filed against various vendors to Stanford's operation should be allowed to proceed.
Last year Stanford was convicted and sentenced to 110 years in prison for defrauding thousands of investors around the world. Because the enforcement division of the Securities and Exchange Commission spent more than a decade ignoring recommendations to investigate from both inside and outside the SEC, victims will likely recover very little of the billions they sent to Stanford.
So plaintiffs lawyers want to take it out on others who did business with Stanford, even if they didn't have anything to do with his bogus offering of certificates of deposit from his bank in Antigua. Stanford told investors that the money backing their CDs was invested in safe, liquid securities that trade in U.S. public markets, when in fact investors were funding a Ponzi scheme.
The trial lawyers want to sue under state law because previous Supreme Court decisions—especially Central Bank of Denver v. First Interstate Bank of Denver and Stoneridge v. Scientific Atlanta—make it difficult under federal law to sue companies that merely did business with fraudsters, unless these vendors directly participated in misleading investors.
Moreover, a 1998 reform prevents securities class-action cases from being brought under state law. The Securities Litigation Uniform Standards Act says that such cases must be filed under federal law if "the defendant used or employed any manipulative or deceptive device or contrivance in connection with the purchase or sale of a covered security."
Covered securities include stocks and bonds issued by firms that trade on U.S. exchanges. At Monday's oral argument, Justice Antonin Scalia noted that Stanford didn't fulfill his promise to put investors' money in these securities, and therefore such a case "can't be in connection with a purchase or sale that has never occurred."
As usual, Justice Scalia is doing a public service by focusing on the text of the law the court is asked to interpret. But a fraudulent claim of buying securities sure sounds to us like a "deceptive device" that's "in connection with" a purchase of securities. Otherwise, could Bernie Madoff argue that he didn't commit securities fraud because he pocketed the cash from victims instead of investing it?
The Justices also wrestled with the significance of Stanford's various deceptions. The U.S. Court of Appeals for the Fifth Circuit had overturned a district court and ruled in favor of the plaintiffs in part because Stanford made other significant misrepresentations unrelated to securities.
But on Monday Paul Clement, attorney for the defendants, rightly noted that without the promise of these liquid assets, "nobody's going to give their money to a bank in Antigua. The reason you give your money to a bank in Antigua is because you think it's backed by something more than a piece of paper, and the something more was purchases of covered securities on the market."
Even if the Supreme Court rules against them, Stanford's victims can still pursue justice via federal class-action suits, or via individual suits in both state and federal court. But overriding federal law to allow suits against defendants who may have done nothing wrong is anything but just.
Read More: http://sivg.org.ag/topic203.html
For a full and open debate on the Stanford Receivership visit the Stanford International Victims Group – SIVG official forum http://sivg.org.ag/
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