Is the SEC Here to Help Defrauded Victims in a Ponzi Scheme, Or Not?

Posted by Kathy Bazoian Phelps

 The Securities Exchange Commission (SEC) plays an active role in protecting the rights of investors. Its own mission statement is:

The mission of the Securities and Exchange Commission is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation.

Yet, in the high-profile Ponzi scheme case of R. Allen Stanford and Stanford Financial Bank, the SEC is finding itself aligned both for and against efforts to recover funds for the benefit of the defrauded victims. Positions taken by the SEC in two different pending litigation matters in the Stanford case may have polar opposite effects on the financial outcome for defrauded investors.

 One case, SEC v. SIPC, now pending in the Circuit Court for the District of Columbia, involves a battle between the SEC and the Securities Investor Protection Corporation (SIPC) over whether the defrauded victims are “customers” under the Securities Investor Protection Act (SIPA) and therefore entitled to payment from SIPC. This is the first time that the SEC has ever commenced an action seeking SIPC coverage for investors. The lower court found that the Stanford investors are not entitled to SIPC coverage, but the SEC continues to champion the cause of the investors in the Circuit Court seeking SIPC coverage for them.

 The other case, Chadbourne & Park LLP v. Troice et al., involves an appeal to the U.S. Supreme Court over the issue of whether Securities Litigation Uniform Standards Act of 1998 (SLUSA) bars lawsuits by a class of victims against third parties to recover their losses from alleged wrongdoers. The Fifth Circuit held that the claims against two law firms, an insurance brokerage firm and a financial services firm could proceed despite SLUSA. The U.S. Government, on behalf of the SEC and other agencies, filed an amicus brief with the Supreme Court arguing that the investor claims should be barred under SLUSA. If the Government’s position prevails, defrauded victims will be denied recovery on their claims.

 In what would be a worst case scenario for the investors, the SEC will lose in SEC v. SIPC so that investors will be denied “customer” status and protection, and the Government’s position in the Chadbourne & Park case will prevail, denying investors the ability to use self-help to sue alleged wrongdoers.

 At a quick glance, it seems that the SEC is on the wrong side of the SLUSA fight in Chadbourne & Park, given the potentially adverse consequences for investors if the SEC’s position is adopted. But perhaps the issue has more do with the way that the applicable statutes are written and interpreted than with any intent on the part of the SEC.

 In Chadbourne & Park, the principal question to be considered by the Supreme Court is:

Does the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”), 15 U.S.C. 77p(b), 78bb(f)(1), prohibit private class actions based on state law only where the alleged purchase or sale of a covered security is “more than tangentially related” to the “heart, crux or gravamen” of the alleged fraud?

SLUSA prohibits a state law class action alleging a purchase or sale of a covered security “in connection with” an untrue statement or omission of material fact. A “covered class action” is a lawsuit in which damages are sought on behalf of more than 50 people, and a “covered security” is a nationally traded security that is listed on a regulated national exchange. So the question remaining is: What does “in connection with” mean? 

The target defendants in the litigation at issue argue that “in connection with” covers the following two factual scenarios that touch “covered securities” in the Stanford case: (1) that Stanford lied to purchasers of CDs and told them that the CDs were backed by investments in stocks; and (2) that some of the CD purchasers must have liquidated stocks in order to purchase the CDs.

 The Fifth Circuit did not agree that either of these two scenarios were sufficient to bar claims under SLUSA, holding that the purchase or sale of a covered security must be more than tangentially related “to the ‘heart,’ ‘crux,’ or ‘gravamen’ of the defendants’ fraud.”  The Fifth Circuit held that the claims against the defendants could proceed.

 The Government, on the other hand, has taken the position in its amicus brief to the Supreme Court that the relevant language of SLUSA was taken from the Securities Exchange Act of 1934 and should be read consistently with similar language in Section 10(b) of the Act.  In urging a broad reading of the words “in connection with,” the Government contends that:

[A] broad reading is essential to the achievement of Congress’s purpose in enacting both Section 10(b) and SLUSA.  Under Section 10(b), it enhances the SEC’s ability to protect the securities markets against a variety of different forms of fraud. Under SLUSA, it furthers Congress’s objective of preventing the use of state-law class actions to circumvent the restrictions by the PSLRA [Private Securities Litigation Reform Act] and by this Court’s decisions constraining private securities-fraud suits.

In an amicus brief taking the contrary position, 16 law professors directly challenge the concept of broadening the application of SLUSA to include the certificates of deposit purchased by the Stanford investors. They note that the certificates of deposit are not themselves covered securities and argue that therefore SLUSA should be “interpreted in a way that does not preclude investors from using state courts to pursue claims seeking traditional state law remedies for acts that do not involve covered securities within the meaning of the federal securities laws.”

 To stress their position that SLUSA should not apply to non-covered bank-issued securities that may be potentially backed by covered securities, the 16 law professors float the following hypothetical class action claims, among others, that they contend would improperly be prohibited under SLUSA if interpreted that broadly:

• "A car dealer who lies to customers about the terms of a car loan, where the car loans are securitized in a pool and interests in the pool are sold off as covered securities."
• "A credit card company that securitizes credit card balances fails to pay appropriate wages to telephone operators and answering card holder questions, and the operators file a state class action alleging violations of state wage and hour laws."
• "A nationally-traded securities clearing firm engages in sex discrimination in compensating clerical workers for work done in the securities office, and the workers file a sex discrimination class action law suit."

In summary, where the Supreme Court draws the lines on the application of SLUSA could have a significant impact on a variety of state law claims that may or may not have much to do with securities. The SEC stands behind a broad reading of SLUSA under the pretense of protecting the securities market, but its position appears to have the consequence of harming, not helping, defrauded victims by blocking state law damage claims.

 The issues are undoubtedly complicated, and there are a variety of competing considerations. From the investors’ perspective, however, they can just add this to the list of roadblocks to getting their money back.

Read More: http://sivg.org.ag/topic232.html 

  For a full and open debate on the Stanford Receivership visit the Stanford International Victims Group - SIVG official forum http://sivg.org.ag/

U.S. justices divided in Allen Stanford Ponzi scheme case

On the first day of its new term on Monday, the U.S. Supreme Court appeared divided over whether lawyers, insurance brokers and others who worked with convicted swindler Allen Stanford could avoid lawsuits by investors seeking to recoup losses incurred in his $7 billion Ponzi scheme.

 New York-based law firms Chadbourne & Parke and Proskauer Rose and insurance brokerage Willis Group Holdings Plc were all sued by former Stanford investors.

They are part of a consolidated case along with two other defendants, financial services firm SEI Investments and insurance company Bowen, Miclette & Brittin, for which the Supreme Court heard a one-hour argument on Monday.

The defendants sought Supreme Court review after the New Orleans-based 5th U.S. Circuit Court of Appeals in March 2012 said the lawsuits brought under state laws by the former Stanford clients could go ahead.

 The former Stanford clients are keen to pursue state law claims because the Supreme Court has previously held that similar so-called "aiding and abetting" claims cannot be made under federal law.

The defendants have argued that under the Securities Litigation Uniform Standards Act (SLUSA), the claims cannot be heard under state law either.

The class action lawsuits filed by the former investors accused Thomas Sjoblom, a lawyer who worked at both law firms, of obstructing a Securities and Exchange Commission probe into Stanford, and sought to hold the other defendants responsible as well.

Stanford's fraud involved the sale of certificates of deposit by his Antigua-based Stanford International Bank. Much of the litigation centers on whether these qualified as securities under applicable laws.

 Stanford is serving a 110-year prison sentence.

ORAL ARGUMENT 

During Monday's oral argument, the justices questioned to what extent a ruling in favor of the plaintiffs would affect the SEC. The Obama administration, representing the SEC, sided with the defendants.

The administration said in court papers it was against the lawsuits because they would conflict with Congress's intent to give the SEC the "ability to protect the securities markets against a variety of different forms of fraud."

 Justice Department lawyer Elaine Goldenberg told the justices that lawsuits like those filed by the Stanford investors have "a very particular effect on investor confidence and the integrity of the markets, which is one of the purposes of the securities laws."

 Several justices, including Justice Elena Kagan and Justice Stephen Breyer, indicated they would be uncomfortable with allowing such lawsuits to proceed in state court, although they also seemed keen for some kind of limit to federal authority.

Justice Anthony Kennedy, often the swing vote in close cases, questioned whether the claims made by the Stanford investors were any different from similar cases that courts already have determined to be excluded from state law claims.

But Justice Anthony Scalia signaled support for the plaintiffs on the language of the federal law in question, which says that state lawsuits are barred in relation to activity "in connection with the purchase or sale" of a covered security.

"There has been no purchase or sale here," he said.

A ruling in the case is expected before the term ends in late June.

The cases are Chadbourne & Parke LLP v. Troice et al, U.S. Supreme Court. No. 12-79; Willis of Colorado Inc et al v. Troice et al, U.S. Supreme Court, No. 12-86; and Proskauer Rose LLP v. Troice et al, U.S. Supreme Court, No. 12-88.  

Read More: http://sivg.org.ag/topic229.html  

For a full and open debate on the Stanford Receivership visit the Stanford International Victims Group - SIVG official forum http://sivg.org.ag/

SLUSA – decision being heard today!!

Stanford Ponzi Scheme Opens Supreme Court Term 

Dispute Over Whether Law and Insurance Firms Can Be Sued Is Among Spate of Business Cases on Docket.

 By BRENT KENDALLCONNECT

Victims of his Ponzi scheme want to be able to sue third parties.

When Supreme Court justices return to the bench Monday after a three-month summer break, R. Allen Stanford's $7 billion Ponzi scheme will await them.

 The court will hear oral arguments on the first day of its 2013-14 term to decide whether Mr. Stanford's victims should be allowed to sue third parties such as law firms and insurance brokers on allegations that they aided Mr. Stanford's scheme.

 Advocates for the defendants warn that allowing such lawsuits could compromise congressional efforts to curb unwarranted litigation that affects securities markets.

 Supporters of Mr. Stanford's victims say Congress never intended to shield wrongdoers in cases where people were tricked into investing in bogus private offerings.

 The case is among more than two dozen on the court's docket that could have implications for businesses. "These aren't the sexiest cases but they're incredibly important," says Thomas C. Goldstein of Goldstein & Russell PC, a veteran attorney before the high court who will argue for victims of the Stanford Ponzi scheme.
Mr. Stanford, once known for his jets, yachts and passion for cricket, was convicted last year and sentenced to 110 years in prison. U.S. authorities said the financier bilked investors by selling them certificates of deposit that he falsely claimed were backed by safe investments. Instead, he used new sales of CDs to pay other investors while funneling money into risky real-estate assets and his own businesses, prosecutors said.

 Investors now are going after law and financial-services firms with ties to Mr. Stanford's operations. Victims allege in class-action lawsuits filed under Louisiana and Texas laws that SEI Investments Co. SEIC -1.14%and insurance brokers, including subsidiaries of Willis Group Holdings misrepresented the CDs as safe investments. The plaintiffs also allege that law firms Proskauer Rose LLP and Chadbourne & Parke LLP knowingly helped Mr. Stanford's Antigua-based bank evade regulatory oversight.

 The defendants say that defrauded investors are targeting deep-pocketed third parties with remote connections to the Stanford enterprise because Mr. Stanford and his companies are insolvent.

Pennsylvania-based SEI declines to comment beyond its court papers, which say it merely provided a Stanford affiliate with back-office services. Willis Group says in briefs that it helped Mr. Stanford's bank purchase ordinary insurance policies. A spokeswoman says the company looks forward to the Supreme Court's review.

 The law firms say in briefs that they didn't make misrepresentations to investors, calling the suits baseless. Representatives for the law firms didn't respond to requests for comment.

 The defendants will be represented Monday by prominent Supreme Court lawyer Paul Clement of Bancroft PLLC, who will argue that the lawsuits are barred under the 1998 federal Securities Litigation Uniform Standards Act, which largely prohibits state-law class-action claims for securities fraud.

 Mr. Clement says in briefs that Congress was concerned about abusive litigation and wrote the law broadly to stop "enterprising lawyers" from using state law to evade federal limits imposed by Congress and the Supreme Court.

 The defendants received a boost from the Obama administration, which filed a brief, signed by the Securities and Exchange Commission, urging the Supreme Court to rule against the investor suits in Chadbourne & Parke v. Troice.

 The Fifth U.S. Circuit Court of Appeals ruled last year that the cases against the third parties could move forward. The appellate court, which is based in New Orleans, held that the fraudulent CDs weren't securities traded on national markets, meaning that the federal restrictions on securities-fraud lawsuits didn't apply in the same way.

 "We don't think Congress wanted to snuff out really the only effective remedy for fraud in these state-regulated CDs," says Mr. Goldstein, the plaintiffs' lawyer.


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/

Proskauer, Hunton, Chadbourne Attack Antiguan Stanford Deal

By Maria Chutchian

Proskauer Rose LLP, Hunton & Williams LLP and Chadbourne & Parke LLP on Thursday challenged a settlement between the U.S. and Antiguan receivers in charge of compensating victims of Robert Allen Stanford's $7 billion Ponzi scheme, saying the deal exposes them to duplicative litigation.

The three firms join Greenberg Traurig LLP in urging a Texas court to reject the settlement, which will resolve disputes about jurisdiction over $300 million that Stanford had in the U.K., Switzerland and Canada.

Proceedings are already underway in the U.S. that are looking to hold the law firms liable with respect to their legal work for Houston-based Stanford Financial Group, alleging that they did not do enough to stop Stanford’s fraud.

Furthermore, the deal ignores earlier court-ordered prohibitions to the U.S. and Antiguan receivers pursuing independent lawsuits against lawyers and duplicating their efforts in the two nations' court systems, as well as terms that would allow the Antiguan receivers to conduct U.S. discovery without being subject to the personal jurisdiction of U.S. courts, the firms argue.

The settlement agreement includes a provision that allows the receivers and government agencies to pursue the same claims in different jurisdictions, the firms contend. This could force them to defend themselves against the same allegations both in the U.S. District Court for the Northern District of Texas and again in Antigua.

“This result creates the possibility of inconsistent judgments, and in any event would entail a waste of judicial resources and the resources of the parties,” Proskauer said in its objection to the deal.

The firms are asking the court to either deny the settlement should or remove the provision that allows for the duplicate claims.

Stanford rose to prominence as the head of the multinational financial services group that bore his name, whose banking arm was the Stanford International Bank in Antigua. The four firms that have objected served as outside law firms to some of Stanford's companies for a time, but all have denied any knowledge or culpability in his massive scheme.

After investigators in February 2009 alleged that the consistently above-average returns Stanford promised were possible only because of fraud, regulators in both Antigua and the U.S. appointed receivers to handle the claims. They had been at odds until the settlement was reached.

The settlement, announced March 12, would allow distributions to victims to go forward without litigation between the U.S. receiver and his counterparts in Antigua — joint liquidators Marcus Wide and Hugh Dickson of the accounting firm Grant Thornton — threatening to disrupt the process as it had in the past.

A hearing in Antigua on the proposed settlement, which requires U.S., U.K. and Antiguan approval, is scheduled for April 8.

Stanford was convicted of securities fraud in March 2012 and sentenced to 110 years in prison.

Proskauer is represented by Bruce W. Collins and Neil R. Burger of Carrington Coleman Sloman & Blumenthal LLP and by James P. Rouhandeh, Daniel J. Schwartz and Richard A. Cooper of Davis Polk & Wardwell LLP.

Chadbourne is represented by Harry M. Reasoner and William D. Sims Jr. of Vinson & Elkins LLP and by Daniel J. Beller, Daniel J. Leffell and William B. Michael of Paul Weiss Rifkind Wharton & Garrison LLP.

Hunton is represented by Richard A. Sayles and Shawn Long of Sayles Werbner and by Jeffrey D. Colman, David Jiménez-Ekman, April A. Otterberg Kaija K. Hupila of Jenner & Block LLP.

U.S. receiver Ralph Janvey is represented by Kevin M. Sadler, Scott D. Powers and David T. Arlington of Baker Botts LLP.

The case is Securities and Exchange Commission v. Stanford International Bank Ltd. et al., case number 3:09-cv-00298, in the U.S. District Court for the Northern District of Texas.

For a full and open debate on the Stanford Receivership visit:

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The Stanford International Victims Group Forum

Supreme Court to hear law firm appeals in Allen Stanford case

Supreme Court to hear law firm appeals in Allen Stanford case

Terry Baynes and Jonathan StempelReuters
January 18, 2013

The Supreme Court on Friday accepted appeals by law firms that once represented convicted swindler Allen Stanford and were trying to avoid lawsuits by victims seeking to recoup losses from his $7 billion Ponzi scheme.

Former Stanford clients had sued the New York-based firms Chadbourne & Parke and Proskauer Rose, as well as Thomas Sjoblom, a lawyer who worked at both.

These lawsuits, brought under state laws, accused Sjoblom of obstructing a U.S. Securities and Exchange Commission probe into Stanford, and sought to hold Chadbourne and Proskauer responsible as well.

The insurance brokerage Willis Group Holdings Plc was also sued over its alleged role in Stanford's fraud.

The defendants countered that the federal Securities Litigation Uniform Standards Act, or SLUSA, precluded state-law class actions involving alleged misrepresentations made "in connection with" the purchase or sale of covered securities.
 
Stanford's fraud had been centered on the sale of certificates of deposit by his Antigua-based Stanford International Bank, and much of the litigation centered on whether these qualified as securities under the applicable laws.

In October 2011, Dallas federal judge David Godbey ruled that SLUSA preempted the state law class-action litigation, noting that many investors sold securities to invest in the CDs, but the 5th U.S. Circuit Court of Appeals revived the cases.

Chadbourne, Proskauer and Willis appealed that decision to the Supreme Court, saying that lower courts are split on the issue, and that similar lawsuits over Bernard Madoff's Ponzi scheme have also been barred by SLUSA.

Stanford is serving a 110-year prison sentence following his sentencing last June. On January 11, a court-appointed receiver proposed that 18,000 of his defrauded investors would receive an initial $55 million payment on their claims, an average of roughly $3,000 per person.

The court could hear the appeal in April, and if it does would likely issue a decision by the end of June.

The cases are Chadbourne & Parke LLP v. Troice et al, U.S. Supreme Court. No. 12-79; Willis of Colorado Inc et al v. Troice et al, U.S. Supreme Court, No. 12-86; and Proskauer Rose LLP v. Troice et al, U.S. Supreme Court, No. 12-88.


For a full and open debate on this and other important issues visit Stanford International Victims Group Forum

Looks like all the class actions are going to be thrown out thanks to SLUSA!!

Proskauer, Chadbourne off the hook in Ponzi scheme class action

Davis Polk & Wardwell and Paul, Weiss, Rifkind, Wharton & Garrison had to make a key strategic decision when they moved to dismiss a securities class action accusing Proskauer and Chadbourne & Parke of abetting R. Allen Stanford's Ponzi scheme. The firms had a veritable arsenal of defenses to deploy: qualified immunity because the law firm defendants were acting as counsel to Stanford; no evidence of fraudulent intent by the law firms; no duty to Stanford's investors. But the first defense both Davis Polk and Paul Weiss chose to assert in motions to dismiss on behalf of Proskauer and Chadbourne was more technical. The Dallas federal court class action, they asserted, had to be dismissed because the Securities Litigation Uniform Standards Act of 1998 pre-empts its claims, which were all grounded in Texas state law.

"Putting aside the absence of any viable federal claims," wrote Proskauer's counsel from Davis Polk, "because plaintiffs have chosen to bring their claims not only on their behalf, but also on behalf of a putative class, their claims are barred by SLUSA, and they cannot 'be maintained' as a class action in this or any other court."

The strategy turned out to be a good one. On Friday U.S. District Judge David Godbey of Dallas federal court dismissed the class action without granting leave to appeal. The case, he said, was precluded by SLUSA. You have to give class counsel from Castillo Snyder and Strasburger & Price credit for trying to get around the U.S. Supreme Court's 2008 ruling in Stoneridge v. Scientific-Atlanta, which pretty much cuts off federal securities law claims against the law firms, auditors, and investment advisers to accused fraudsters. The allegations against Chadbourne and Proskauer all involved the advice that Stanford counsel Thomas Sjoblom (who lateraled from Chadbourne to Proskauer after he began representing the Ponzi schemer) gave to his client. The class didn't offer evidence that either of the law firms communicated directly with Stanford's investors -- the standard they would have had to meet to bring federal securities claims.

So instead, the amended class action complaint against Sjoblom, Chadbourne, Proskauer, and a former Stanford general counsel was based on Texas's state securities laws. The complaint claimed that former Securities and Exchange Commission enforcement lawyer Sjoblom -- and, by extension, the firms at which he practiced -- should have known Stanford was running a Ponzi scheme, but helped keep him afloat nonetheless.

If Stanford had been trading stock, it would have been a no-brainer for Davis Polk and Paul Weiss to cry SLUSA. He wasn't. Stanford sold investors instruments he called CDs from the Antiguan bank he controlled. These CDs functioned as mutual or hedge fund shares. But it wasn't entirely clear that they fell under SLUSA's definition of securities, which is limited to instruments traded on a national exchange. Davis Polk argued that because Stanford investors liquidated stock and bond holdings in order to purchase Stanford CDs -- and because Stanford claimed that the CDs were backed by stocks and bonds -- the Stanford instruments fell under SLUSA's definition of a covered security.

Because Godbey agreed, he never even reached the other defenses Proskauer and Chadbourne -- and, for that matter, other Stanford defendants whose motions to dismiss he granted on SLUSA grounds -- might have argued. Proskauer counsel James Rouhandeh of Davis Polk declined comment, as did Chadbourne counsel Daniel Beller. I left a message with class counsel Edward Snyder but didn't hear back.