“The basic purpose of the 1934 and 1933 regulatory statutes is to protect investor confidence in the securities markets. Nothing in those statutes, or in the Litigation Act, suggests their object is to protect persons whose connection with the statutorily defined securities is more remote than buying or selling.”
Justice Stephen Breyer
In a highly-anticipated decision, the Supreme Court issued a ruling Wednesday finding that victims of Allen Stanford’s $7 billion Ponzi scheme could proceed with lawsuits against two prominent law firms and other financial services companies accused of playing a role in Stanford’s scheme. The decision, written by Justice Stephen Breyer, affirmed the Fifth Circuit Court of Appeal’s finding that the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) did not bar pending class action lawsuits against law firms Charbourne & Parke LLP and Proskauer Rose, financial services companies SEI Investments Co. and subsidiaries of Willis Group Holdings PLC, and insurance company Bowen, Miclette & Britt.
SLUSA was enacted in 1998 in an effort to curb state-law securities claims against those who “advise, counsel, and otherwise assist investors” by limiting damages, enforcing heightened pleading standards, and prohibiting claims based on the purchase or sale of a “covered security” – defined as a security listed or traded on a national exchange. While securities such as stocks were indisputably encompassed by this definition, the issue in the Stanford cases was whether a certificate of deposit (“CD”), the investment product hawked by Stanford’s companies that duped victims out of billions of dollars, was similarly included. The law firms and other entities pointed to the statutory language “misrepresentation or omission of a material fact in connection with the purchase of sale of a covered security,” arguing that, while the CDs were not covered securities, the fact that Stanford and his companies represented that investment proceeds would be invested in liquid securities satisfied the required “connection.”
Writing for the majority, Justice Breyer disagreed with that explanation. Reasoning that the connection to covered securities was too attenuated to satisfy SLUSA and questioning why “federal securities laws would be – or should be – concerned with shielding such entities from lawsuits, Justice Breyer stated that “a fraudulent misrepresentation or omission is not made ‘in connection with’ such a ‘purchase or sale of a covered security’ unless it is material to a decision by one or more individuals (other than the fraudster) to buy or sell a ‘covered security.'” Noting that there were no allegations that the alleged misrepresentations led anyone to buy or sell covered securities, Justice Breyer held that
the “someone” making that decision to purchase or sell must be a party other than the fraudster. If the only party who decides to buy or sell a covered security as a result of a lie is the liar, that is not a “connection” that matters.
In a dissent, Justice Kennedy, joined by Justice Alito, argued that the case was consistent with prior precedent and centered on victims’ decision to invest their money based on a fraudster’s promise to invest it on their behalf through purchases and sales in the securities markets. According to Stanford, the investments in CDs were a liquid investment that could be freely liquidated and subsequently invested in national securities markets. Indeed, Justice Kenned makes the point that Stanford’s entity did in fact purchase covered securities as promised – albeit only about 10% of its portfolio while the remainder largely went towards Caribbean real estate.
Justice Kennedy also worried that the decision would result in an increased focus on third parties that provide assistance and counsel to investors in securities markets, cautioning that the Court’s decision would have drastic effects on similar suits going forward:
The Court’s narrow reading of the statute will permit proliferation of state-law class actions, forcing defendants to defend against multiple suits in various state fora. This state-law litigation will drive up legal costs for market participants and the secondary actors, such as lawyers, accountants, brokers, and advisers…a serious burden…[that] will make the national securities markets more costly and difficult to enter.
While the ruling made no determination on the merits, it certainly bolsters the victims’ cases moving forward as what had previously been thought to be a difficult hurdle had been cleared.
A copy of the Supreme Court’s decision is below: