The CDs, issued by Stanford’s bank and sold by his securities firm, don’t qualify as “covered” under the federal SLUSA law. That means the CDs by themselves don’t give the defendants the right to have the state-law case dismissed.
“Nobody contends that we bought anything other than non- covered assets,” the investors’ lawyer, Tom Goldstein, argued today.
The law firms and Willis units argue that SLUSA applies because the Stanford Financial Group Co. reneged on promises to use proceeds from the investments to buy securities that are covered. “Covered” securities include publicly traded stocks and bonds.
Justice Antonin Scalia indicated he read the statutory language -- “in connection with the purchase or sale of a covered security” -- as letting the Stanford suits go forward.
“There has been no purchase or sale here,” he said. “It can’t be in connection with a purchase or sale that has never occurred.”
Justice Samuel Alito disagreed, suggesting he read the “in connection with” phrase broadly.
“It doesn’t say a misrepresentation ‘about’ the covered security,” Alito said. “It says a misrepresentation ‘in connection with.’”
Several justices said they were concerned that the position urged by the Obama administration and the defendants would expand the federal securities laws to a number of new areas. Chief Justice John Roberts asked whether a person would be violating the securities law by lying about stock ownership on a mortgage application.
Justice Elena Kagan asked a similar question about someone who agreed in a prenuptial agreement to sell Google stock in order to buy a home.
“Is that covered by the securities law now?” she asked Paul Clement, the lawyer for the defendants.
Clement said the court didn’t need to go that far to rule in favor of his clients, saying the promise to buy covered securities was central to the Stanford fraud.
“The security of the underlying investments was the most important factor” in prompting the investors to buy the CDs, he said.
A New Orleans-based federal appeals court said the alleged misrepresentations were “only tangentially related” to any covered security. The ruling let investors’ suits filed under Louisiana and Texas state law go forward, reversing a trial judge who had thrown out the claims.
A federal jury convicted Stanford in March 2012 on 13 charges brought in connection with his Ponzi scheme, including four counts of wire fraud and five of mail fraud. He was sentenced in June to 110 years in prison.
Prosecutors said Stanford wasted investors’ money on failing businesses, yachts and cricket tournaments and secretly borrowed as much as $2 billion from his bank. In a Ponzi scheme, money from the newest investors is used to fund the returns that have been promised to previous investors.
The Supreme Court cases are Chadbourne & Park v. Troice, 12-79; Willis v. Troice, 12-86; and Proskauer Rose v. Troice, 12-88.
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