Supreme Court Takes Up Stanford Ponzi Scheme Case

Oct 9 2013 | 9:59am ET

The U.S. Supreme Court on Monday heard arguments about one of the larger Ponzi schemes uncovered during the financial crisis.

The justices heard oral arguments in a case stemming from the $7 billion R. Allen Stanford fraud. Stanford's guilt—and his 110-year prison sentence—are not at issue. Instead, the high court is considering whether Stanford's victims can sue his service providers over securities which never actually existed.

At issue is the 1998 federal Securities Litigation Uniform Standards Act, which prohibits many class-action fraud lawsuits from state courts. In many cases, Stanford's victims brought their cases in state court, believing they stood a better chance of success.

The service providers—law firms, insurance brokerages and banks, among others—say that, since Stanford lied to his investors by telling them that the proceeds of the certificates of deposit he sold would be invested in liquid securities, that is enough to meet the law's requirement that the fraud be "in connection with the purchase or sale of a covered security." The investors, backed by the federal government, called lying about covered securities "classic securities fraud."

The whole matter of non-existent securities made many of the justices distinctly uncomfortable. Chief Justice John Roberts asked whether a phony list of stocks owned by a mortgage applicant would be a "covered transaction," a point that Justice Elena Kagan also covered with a  question about prenuptial agreements. Kagan also asked whether the fraud moved markets.

Justice Stephen Breyer worried that the service provider's argument means there are innumerable instances of securities fraud. Justice Antonin Scalia added that he "assumed that the purpose of the securities laws was to protect the purchasers and sellers of the covered securities," which do not exist in this case.

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