A few weeks ago, the faculty here gave a lunchtime discussion of various SCOTUS cases in the 2013OT. As a corporate law professor, there's never a lot to choose from, and this year's skimpy offering was no different. I chose the consolidated cases of Chadbourne & Parke LLP v. Troice; Proskauer Rose LLP v. Troice and Willis of Colorado Inc. v. Troice. (Documents courtesy of Scotusblog.) Though the names do not suggest it, these are the private securities lawsuits stemming from Allen Stanford's Ponzi Scheme. Mr. Stanford is serving 100 years in prison right now and probably doesn't have a lot of extra cash lying around, so investors have chosen to sue these other entities. Because federal securities law is not very amenable to securities fraud lawsuits against aiders and abetters (like these defendants would be), these cases were brought under state law.
Unfortunately, federal securities law, and the Private Securities Litigation Reform Act, is not that easy to bypass. Defendants wanted the case dismissed under the Securities Litigation Uniform Standards Act, which pre-empts class actions in which plaintiffs allege a misrepresentation in connection with the purchase or sale of a "covered security." As you can tell from my quotation marks and boldface, plaintiffs counter that the fraud was not in connection with a "covered security."
What was the fraud? Stanford touted certificates of deposit (CD) accounts that paid 10% (what?) at Stanford International Bank, based in Antigua. Now, CDs at U.S. banks aren't considered securities at all, but the SEC and the DOJ argued that Stanford committed securities fraud in the purchase and sale of a security anyway. However, these charges were dropped in favor of wire fraud, obstruction and money laundering, and he was convicted on those counts.
That being said, no one is arguing that the CDs aren't a "security." But, plaintiffs argue that the CDs aren't a "covered security." A covered security is one that is listed on a regulated national exchange and traded nationally. The CDs are definitely not covered securities. But, SIB represented that the accounts were backed by "safe, liquid investments" and that monies were "invested in a well-diversified portfolio of highly marketable securities issued by stable governments, strong multinational companies and major international banks." Defendants argue that this is enough to meet the "in connection with" standard -- the monies were supposed to be used to purchase covered securities at some point. (The money was never used to purchase anything, but no one is taking the "phantom securities aren't securities" angle in this post-Madoff era!) In addition, defendants make the argument, and the SEC was using this argument in the Stanford case, that at least one plaintiff sold covered securities to invest in the CDs. If the defendants are right, then the case is dismissed under SLUSA and cannot continue in any court as a class action.
Here is the transcript of the oral arguments on the first day of the term. Other commentators seem to think it was split and that defendants may win. I wasn't there, but the transcript seems to suggest that the justices were very skeptical of the reach of the defendants arguments. Both the "in connection with" argument and the "selling covered securities to purchase the fraud" arguments seem to bring up spectres of ordinary purchases becoming securities fraud fodder. I.e., if I sell stock to buy a house, the seller better not say anything misleading or its securities fraud for you! I hope the plaintiffs win for this and other reasons.
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