This week, in Chadbourne & Parke LLP v. Troice et al., the Supreme Court permitted investors in Allen Stanford’s $7 billion Ponzi scheme to pursue a class-action lawsuit against lawyers and brokers formerly associated with Stanford. Carrington Coleman attorneys Bruce Collins and Neil Burger represented one of the defendants, Proskauer Rose.
Until his arrest in 2009, Stanford sold certificates of deposit in his Antigua-based Stanford International Bank. Investors brought a class-action lawsuit under the Texas Securities Act once authorities alleged the bank was a massive Ponzi scheme. In a 7-2 decision, the justices ruled the suit could proceed despite the Securities Litigation Uniform Standards Act (SLUSA), which prohibits state-law-based class actions claiming fraud in connection with “a covered security.”
According to the court, because the CDs were not listed on a national exchange or traded nationally, they were not “covered securities” under the statute, and therefore SLUSA did not apply. The court recognized that Stanford promised investors the CDs were backed by stocks and bonds, but concluded those purported securities were secondary to the CDs that formed the crux of the lawsuit. More specifically, the alleged misrepresentations with respect to stocks and bonds were not “material to a decision by one or more individuals (other than the fraudster) to buy or to sell a ‘covered security.’” As a result, the Supreme Court affirmed the Fifth Circuit, which had remanded the case for further proceedings in the trial court.
Until his arrest in 2009, Stanford sold certificates of deposit in his Antigua-based Stanford International Bank. Investors brought a class-action lawsuit under the Texas Securities Act once authorities alleged the bank was a massive Ponzi scheme. In a 7-2 decision, the justices ruled the suit could proceed despite the Securities Litigation Uniform Standards Act (SLUSA), which prohibits state-law-based class actions claiming fraud in connection with “a covered security.”
According to the court, because the CDs were not listed on a national exchange or traded nationally, they were not “covered securities” under the statute, and therefore SLUSA did not apply. The court recognized that Stanford promised investors the CDs were backed by stocks and bonds, but concluded those purported securities were secondary to the CDs that formed the crux of the lawsuit. More specifically, the alleged misrepresentations with respect to stocks and bonds were not “material to a decision by one or more individuals (other than the fraudster) to buy or to sell a ‘covered security.’” As a result, the Supreme Court affirmed the Fifth Circuit, which had remanded the case for further proceedings in the trial court.
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