Investors in Allen Stanford's $7 billion Ponzi scheme can sue to recoup losses from lawyers, insurance brokers and others who worked with the convicted swindler, the U.S. Supreme Court ruled on Wednesday.
On a 7-2 vote, the court held that lawsuits filed in state courts can go forward.
Stanford's fraud involved the sale of bogus certificates of deposit by his Antigua-based Stanford International Bank. He is serving a 110-year prison sentence.
New York-based law firms Chadbourne & Parke and Proskauer Rose and insurance brokerage Willis Group Holdings Plc were all sued by former Stanford investors. The investors also sued financial services firm SEI Investments and insurance company Bowen, Miclette & Britt.
"It's clear the justices understood that ruling for the defendants would create an immunity that Congress never imagined," said Tom Goldstein, a lawyer representing the former Stanford clients.
A Chadbourne spokesman said that when the case returns to the lower court the defendants would move to dismiss the suit on other grounds. Representatives for the other defendants did not immediately respond to requests seeking comment.
Writing for the majority, Justice Stephen Breyer said the Securities Litigation Uniform Standards Act (SLUSA) did not prevent the state lawsuits from proceeding. The law says that state lawsuits are barred when the alleged misrepresentations are "in connection with" the purchase or sale of a covered security, which is defined as a security listed on a national exchange at the time the alleged unlawful conduct occurred.
As the defendants in the case were not selling securities traded on U.S. exchanges, "it is difficult to see why the federal securities laws would be - or should be - concerned with shielding such entities from lawsuits," Breyer wrote.
The defendants had sought Supreme Court review after the New Orleans-based 5th U.S. Circuit Court of Appeals in March 2012 said the lawsuits brought under state laws by the former Stanford clients could go ahead.
The former Stanford clients are keen to pursue state law claims because the Supreme Court has previously held that similar "aiding and abetting" claims cannot be made under federal law.
The class-action lawsuits filed by the former investors accused Thomas Sjoblom, a lawyer who worked at both law firms, of obstructing a Securities and Exchange Commission probe into Stanford, and sought to hold the other defendants responsible as well.
IMPACT ON SEC
The Obama administration, representing the SEC, had sided with the defendants to try to protect the agency's authority to pursue wide-ranging investigations.
The administration said the "in connection with" language in SLUSA that limits state court lawsuits mirrors language in federal law that gives broad authority of the SEC to pursue such misrepresentations.
The agency, via a spokesman, declined to comment on the ruling.
Justice Anthony Kennedy wrote in a dissenting opinion that the ruling would have a negative impact on the SEC because it "casts doubt on the applicability of federal securities law to cases of serious securities fraud." Kennedy was joined in dissent by Justice Samuel Alito.
Breyer responded to Kennedy's concerns in his opinion, saying that the majority's interpretation would not "significantly curtail the SEC's enforcement powers," because SEC authority extends to all securities, not just covered securities.
Breyer added that the SEC had failed to provide an example of a past enforcement action that would be prevented in the future under the court's interpretation of the law.
The cases are Chadbourne & Parke LLP v. Troice et al, U.S. Supreme Court. No. 12-79; Willis of Colorado Inc et al v. Troice et al, U.S. Supreme Court, No. 12-86; and Proskauer Rose LLP v. Troice et al, U.S. Supreme Court, No. 12-88.