Brokerage Willis can be sued in Stanford Ponzi scheme: Supreme CourtReprints
Investors victimized in a $7 billion Ponzi scheme run by Allen Stanford can sue defendants in the case, including units of Willis Group P.L.C., who were associated with him, the U.S. Supreme Court has ruled.
Mr. Stanford and his companies sold investors certificates of deposits in Stanford International Bank, according to the high court's 7-2 ruling Wednesday in Chadbourne & Parke L.L.P. v. Samuel Troice et al.
They expected the bank would use the money to buy “highly lucrative” assets, but instead Mr. Stanford and his associates used the money provided by new investors “to repay old investors, finance an elaborate lifestyle and to finance speculative real estate ventures,” according to the ruling.
Mr. Stanford, who was convicted and found guilty, is now serving a 110-year prison term.
Four groups of plaintiffs sued firms and individuals who helped sell the bank's certificates of deposit, including brokers Willis of Colorado Inc. and related Willis companies, and Houston-based Browne Mellette & Britt Insurance Agency L.L.C., among other defendants, on the grounds that they helped the bank perpetrate the fraud or conceal it from regulators.
All four suits have been consolidated. The focus of the high court's Wednesday ruling is the 1998 Securities Litigation Uniform Standards Act, which forbids class actions under state law for “covered” securities. The question was whether the law encompasses a class action in which the plaintiffs alleged they purchased “uncovered” securities, or certificates of deposit that are not traded on any national exchange, for which the plaintiffs falsely were told were backed by covered securities.
The Litigation Act states it covers “misrepresentations or omission of material fact in connection with the purchase or sale of a covered security,” the Supreme Court majority said in an opinion written by Justice Stephen G. Breyer. “How broad is that scope? Does it extend further than misrepresentations that are material to the purchase or sale of a covered security?”
“In our view, the scope of this language does not extend further,” the court concluded. “First, the act focuses upon transactions in covered securities, not upon transactions in uncovered securities. Second, a natural reading of the act's language supports our interpretation,” the court said.
“Third, prior case law supports our interpretation. As far as we are aware, every securities case in which this court has found a fraud to be 'in connection with' a purchase or sale of a security has involved victims who took, who tried to divest themselves, or who maintained an ownership interest in financial instruments that fall within the relevant statutory definition,” the court said.
The ruling states that because the Litigation Act does not apply here, the “plaintiffs may maintain their state-law-based class actions, and they may do so either in federal or state court.”
This interpretation is also consistent with the underlying regulatory statutes, the Securities Exchange Act of 1934 and the Securities Act of 1933, the court ruled in affirming a decision the 5th U.S. Circuit Court of Appeals in New Orleans, which had ruled that the falsehoods about the Bank's holdings in covered securities were too “tangentially related” to the “crux” of the fraud to trigger the Litigation Act.
"Although the ruling was confined to a narrow procedural issue, Willis nonetheless disagrees with it and notes that It did not address a host of other legal weaknesses with these lawsuits," a spokesperson for Willis said. "Now that the Supreme Court has resolved this issue, we intend to move promptly to dismiss the entire case."