Law firms may be sued for allegedly aiding Ponzi schemer Stanford, SCOTUS rules
A federal law designed to curb nuisance suits over federal securities does not bar state-law class actions against two law firms and other defendants accused of aiding convicted Ponzi schemer R. Allen Stanford, the U.S. Supreme Court has ruled.
Stanford’s certificates of deposit were not “covered securities” within the meaning of the federal law, the Securities Litigation Uniform Standards Act of 1998, the court ruled in a 7-2 opinion (PDF). The court ruled in appeals involving four class actions, including a suit against two law firms accused of negligently hiring a lawyer who advised Stanford. The law firms are Proskauer Rose and Chadbourne & Parke.
The holding, Justice Stephen G. Breyer wrote for the majority, “will permit victims of this (and similar) frauds to recover damages under state law.” Justice Anthony M. Kennedy wrote a dissent joined by Justice Samuel A. Alito Jr.
The SLUSA barred private lawsuits based on state law stemming from a misrepresentation or omission of material fact in connection with the purchase or sale of a covered security. The plaintiffs had alleged they bought the uncovered certificates of deposit based on false claims that they were backed by covered securities, defined as securities listed for sale or authorized for listing on a national securities exchange.
Breyer said the law does not bar the suit because the certificates of deposit themselves were not covered securities. “A broader interpretation would allow the Litigation Act to cover, and thereby to prohibit, a lawsuit brought by creditors of a small business that falsely represented it was creditworthy, in part because it owns or intends to own exchange-traded stock,” he wrote. “It could prohibit a lawsuit brought by homeowners against a mortgage broker for lying about the interest rates on their mortgages—if, say, the broker (not the homeowners) later sold the mortgages to a bank which then securitized them in a pool and sold off pieces as ‘covered securities.’ ”
In his dissent, Kennedy argued that “today’s decision, to a serious degree, narrows and constricts essential protection for our national securities markets, protection vital for their strength and integrity.”
The case is Chadbourne & Parke v. Troice. Hat tip to SCOTUSblog.
Prior coverage:
ABAJournal.com: “Can BigLaw firms be sued by investors for advising Ponzi schemer Stanford? SCOTUS to decide”
