Proskauer, Chadbourne Could Face Billions In Damages From Ponzi SchemeFebruary 28, 2014
The liability headache has only just begun for Proskauer Rose LLP and Chadbourne & Parke LLP, which now face potentially billions of dollars in damages after the Supreme Court ruled Wednesday that victims of Robert Allen Stanford’s Ponzi scheme can sue the law firms over their alleged role in the scheme.
The high court in a 7-2 decision affirmed a Fifth Circuit ruling allowing four state-law class actions over the Ponzi scheme to move forward. The suits alleged Proskauer, Chadbourne, two insurance brokers and a financial services firm aided the Ponzi scheme, in which Stanford’s foreign bank sold investors sham securities called certificates of deposit. Stanford was sentenced to 110 years in prison in June 2012.
Plaintiffs attorney Edward C. Snyder called the ruling “a major victory and hopefully a game changer for the Stanford victims.”
“Up until now they’ve had pretty much nothing but bad news,” Castillo said. “We’ve finally got some good news.”
The ruling resolved a circuit split over the application of the federal Securities Litigation Uniform Standards Act, or SLUSA, which bars state-law class actions alleging fraud “in connection with” the sale of a SLUSA-covered security. Covered securities are those that trade on a national exchange.
According to the suits, the defendants falsely represented that Stanford’s certificates of deposit, which were not covered by SLUSA, were backed by safer, covered securities. The Fifth Circuit found that the cases were not barred by SLUSA because any alleged misrepresentations about covered securities were only “tangentially related” to the Ponzi scheme.
Justice Stephen Breyer, writing for the majority, said the court’s relatively narrow interpretation of the “in connection with” standard was consistent with SLUSA and other federal securities laws.
In a dissenting opinion, Justices Anthony Kennedy and Samuel Alito warned that the ruling could hamper the federal government’s anti-fraud enforcement efforts. That’s because Section 10(b) of the federal Securities and Exchange Act — a key enforcement tool for the U.S. Securities and Exchange Commission — also contains the “in connection with” language, they said.
Addressing that concern, Justice Breyer claimed that the dissenters and the SEC, which filed an amicus brief in the case, had failed to identify any SEC enforcement action filed in the past 80 years that would be barred under Wednesday’s ruling.
“We believe the basic consequence of our holding is that, without limiting the federal government’s prosecution power in any significant way, it will permit victims of this (and similar) frauds to recover damages under state law,” Justice Breyer wrote. “Under the dissent’s approach, they would have no such ability.”
SEC spokesman John Nester declined to comment.
The suits alleged that Proskauer and Chadbourne, while representing entities affiliated with Stanford, lied to the SEC and helped the financier to evade regulatory oversight. The defendants in the litigation also include financial services company SEI Investments and insurance companies Bowen Miclette & Britt and Willis of Colorado.
David Schaefer, a spokesman for Chadbourne, said in a Wednesday statement that the firm “respectfully disagree[s]” with the ruling. He added that the court had considered only “one narrow procedural issue.” “We moved to dismiss this case on many grounds, not just the SLUSA statute, and the court’s decision means only that the district court will now be in a position to address the other compelling issues we raised as to why the case should be dismissed,” Schaefer said.
A Proskauer spokeswoman said the firm was “disappointed” with the ruling. “The court’s decision relates solely to a narrow procedural question and not the substance of the matter,” the spokeswoman said in a statement. “We remain confident that the underlying claims are baseless and we will continue to seek their dismissal. Proskauer’s former partner was not securities counsel for Stanford and there is no legal or factual basis for attempting to hold him or the firm responsible for Stanford’s actions.”