The decision is a loss for firms that claimed federal securities law insulated them from state class-action lawsuits and sought to have the cases thrown out. But it offers another avenue for more than 21,000 of Stanford's bilked investors to try to recover their lost savings.
Federal law says class-action lawsuits related to securities fraud cannot be filed under state law, as these cases were. But a federal appeals court said the cases could move forward because the main part of the fraud involved certificates of deposit, not stocks and other securities.
The high court agreed in a 7-2 decision, with the two dissenting justices warning that the ruling would lead to an explosion of state class-action lawsuits.
Stanford was sentenced to 110 years in prison after being convicted of bilking investors in a $7.2 billion scheme that involved the sale of fraudulent certificates of deposits from the Stanford International Bank. They supposedly were backed by safe investments in securities issued by governments, multinational companies and international banks, but those investments did not exist.
Former investors who were blocked under federal law from seeking damages from the firms that worked with Stanford filed suit under state law in Louisiana and Texas. But the defendants claimed those suits were also blocked by the Securities Litigation Uniform Standards Act, a federal law aimed at limiting private lawsuits that allege securities fraud.
Writing for the court, Justice Stephen Breyer said the law does not preclude the class-action lawsuits because the fraud at the centre of the scheme does not involve a "covered security." Breyer said the fraud involving certificates of deposit "bears so remote a connection to the national securities market that no person actually believed he was taking an ownership position in that market."
About an hour after Breyer read a summary of his opinion, a protester stood up near the back of the courtroom and called on the justices to overturn their 2010 ruling in Citizens United that freed corporations and labour unions from some limits on campaign spending. The court later identified the protester as Noah Newkirk of Los Angeles and said he was charged with violating a federal law prohibiting anyone from making a "harangue or oration" at the Supreme Court.
Justices Anthony Kennedy and Samuel Alito dissented in the Stanford case, warning that the majority opinion would lead to an explosion of state class-action lawsuits and frustrate the intent of securities laws designed to protect those who advise investors.
"The state-law litigation will drive up legal costs for market participants and the secondary actors, such as lawyers, accountants, brokers and advisers, who seek to rely on the stability that results from a national securities market regulated by federal law," Kennedy said in dissent.
The Obama administration had also argued against allowing the cases to move forward, saying it could interfere with the Securities and Exchange Commission's ability to go after fraud and could weaken investor confidence.
But Breyer said the government failed to show any example of past SEC enforcement actions that would have been prevented by the court's decision. He pointed to the government's successful prosecution of Stanford as proof that similar frauds will continue to be within the reach of federal authorities.
Prosecutors say Stanford persuaded investors to buy certificates of deposit from his bank on the Caribbean island of Antigua. He then used the money to fund a string of failed businesses, bribe regulators and pay for his lavish lifestyle.
Many victims have been disappointed so far that they have recovered only a pittance of their initial investments during a recovery process that has dragged on for more than five years. A court-appointed receiver began distributing part of $55 million in recovered assets to investors last year, just a tiny fraction of what they lost.
The receiver and other court-appointed liquidators have recovered more than $500 million of Stanford's remaining assets so far, but that amount is reduced by millions in attorney fees, expenses and other costs.
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