WASHINGTON -- The Supreme Court ruled Wednesday that the victims of former Texas tycoon R. Allen Stanford's massive Ponzi scheme can go forward with class-action lawsuits against the law firms and investment companies that allegedly aided the fraud.
The decision is a loss for firms that claimed federal securities law insulated them from state class-action lawsuits and sought to have the cases 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 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 fraud at the center of the scheme does not involve a "covered security." Breyer said the fraud "bears so remote a connection to the national securities market that no person actually believed he was taking an ownership position in that market."
Justices Anthony Kennedy and Samuel Alito dissented, warning that the majority opinion would lead to an explosion of state class-action lawsuits, frustrating the intent of securities laws designed to protect those who advise and counsel investors from abusive lawsuits.
"The state-law litigation will drive up legal costs for market participants and the secondary actors, such as lawyers, accountants, brokers and advisers, who seek to rely on the stability that results from a national securities market regulated by federal law," Kennedy said in dissent.