Stanford suits questioned in high court securities clash

The U.S. Supreme Court debated the reach of the federal securities laws, questioning whether investors can sue law firms and outside companies for their alleged roles in R. Allen Stanford’s $7 billion Ponzi scheme.

In an hour-long session sprinkled with questions about home loans and prenuptial agreements, the nine justices gave no clear indication how they will rule, directing skeptical questions at both sides.

The defendants to the suits are in the unusual position of arguing alongside the Securities and Exchange Commission and Obama administration. They are seeking a broad application of federal securities law -- an interpretation that would thwart the Stanford suits from going forward under state law.

The case involves “classic securities fraud,” putting it under federal jurisdiction, said Elaine Goldenberg, a Justice Department lawyer.

The case tests a 1998 U.S. law enacted to prevent investors from using state courts to circumvent federal limits on class-action securities claims. Federal law prohibits punitive damages and requires higher levels of proof than many state laws. It also bars the type of “aiding and abetting” suits the investors are seeking to press in the Stanford cases.

Uniform Standards

Under the 1998 law, known as the U.S. Securities Litigation Uniform Standards Act or SLUSA, investors can’t sue under state law if the case is based on a misrepresentation made “in connection with the purchase or sale of a covered security.”

Because the phrase “in connection with” also governs the SEC’s jurisdiction in a separate statute, a ruling barring the Stanford suits might simultaneously bolster the commission’s powers.

The defendants in the Stanford case include units of Willis Group Holdings Plc, a London-based insurance broker. They are accused of writing letters that gave the investors reason to believe the certificates of deposit they bought were backed by safe, liquid investments. The investors sued the units along with the administrator of a trust Stanford used in his scheme.

Investors are also suing two law firms, Proskauer Rose LLP and Chadbourne & Parke LLP, for allegedly lying to the SEC and helping Stanford evade regulatory oversight. The defendants deny wrongdoing.

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