WASHINGTON (AP) — The Supreme Court on Monday debated whether to allow continued class-action lawsuits from investors who lost billions in former Texas tycoon R. Allen Stanford's massive Ponzi scheme.
Justices listened to lawyers argue over whether lawsuits should proceed against individuals, law firms and investment companies that allegedly aided Stanford's fraud.
Stanford was sent to prison for 110 years after being convicted of what prosecutors termed a $7.2 billion Ponzi scheme on investors. The fraud stemmed from the sale of certificates of deposits from the Stanford International Bank that supposedly were backed by safe investments in securities issued by governments, multinational companies and international banks. But those investments did not exist.
At issue before the court is whether the federal Securities Litigation Uniform Standards Act, a federal law aimed at limiting private lawsuits that allege securities fraud, can be used to block the suits investors filed in Louisiana and Texas. The law says class-action suits related to securities fraud cannot be filed under state law, as these suits were.
A federal judge initially threw them out, but the 5th U.S. Circuit Court of Appeals in New Orleans said the suits could go forward. The appeals court found that the investment scheme is not covered by SLUSA because the main part of the fraud involved the certificates of deposit, not stocks and other securities.
"What has to be bought here is a stock, and instead, what was bought here was a CD," lawyer Thomas Goldstein said. "This is a case of a massive fraud. He could well have said, this is a case of a massive securities fraud. But it was not a case of a covered securities fraud. The plaintiffs here bought something that Congress specifically excluded from preclusion under SLUSA."
A couple of the justices suggested that because there had been no actual purchase or sale of a covered security — only promises — this case could not fall under the federal law.
The law "could have read 'in connection with the purchase or sale,' or the 'promised purchase or sale', or the 'contemplated purchase or sale,' but it doesn't. It says, 'in connection with the purchase or sale,'" said Justice Antonin Scalia. "I don't know how you can make that stick to a situation where there has been no purchase or sale."
"That's true, your honor, but it also doesn't say the consummated purchase or sale. And so I think the purported, intended, consummated, all those things are swept up in the text," Justice Department lawyer Elaine J. Goldenberg said.
Lawyer Paul Clement warned justices against creating an artificial line. "You don't want to draw a line that basically says, look, if you buy different securities than you were supposed to or you sell fewer than you were supposed to, that's covered, but if you're a Madoff and you go all the way and simply lie about the whole thing and there never were any securities purchases at all, that that's somehow better," Clement said.
Justices will make a ruling sometime next year.