Stanford Lawsuit Against SEC Junked

Aug 14 2013 | 8:56am ET

The Securities and Exchange Commission cannot be sued for failing to alert R. Allen Stanford's clients that it suspected—rightly, it turned out—that he was a fraud.

A federal judge in Miami this week tossed a would-be class-action lawsuit against the regulator, ruling that the SEC was protected by an exception to the Federal Tort Claims Act forbidding suits arising from deceit.

According to the plaintiffs, who say they lost $1.65 million investing with Stanford, who was convicted of running a Ponzi scheme last year, the SEC found Stanford's business a fraud in four separate examinations between 1997 and 2004, but failed to let the Securities Investor Protection Corp. know. The SEC eventually sued Stanford in 2009.

"The plaintiffs claim that they were induced into entering disadvantageous business transactions because of the SEC's misrepresentation," U.S. District Judge Robert Scola wrote. "The plaintiff's cause of action is a classic claim for misrepresentation."

The plaintiffs plan to appeal the decision.

"We believe that the judge did not draw the appropriate distinction between a claim based on misrepresentation and our claim based on failure to warn in line with the SEC's mandatory duty to notify the SIPC," Gaytri Kachroo, their lawyer, said.

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