The U.S. Supreme Court has ruled that Ponzi scheme victims can go after a fraudster’s service providers in state court.
The high court found that victims of R. Allen Stanford’s $7 billion fraud are free to bring their class-action suits in state court, where they believe they have a better chance of success. The 19-page ruling, written by Justice Stephen Breyer, gives Stanford victims a chance to recover more of their lost money, but is limited to Ponzi schemes—and limited further to products that aren’t considered securities.
The decision “will permit victims of this (and similar) frauds to recover damages under state law,” Breyer wrote.
The ruling found an exception in a 1998 federal law prohibiting many class-action fraud lawsuits from state court. Breyer, in the 7-2 decision, said that law does not cover when the securities allegedly involved weren’t real and weren’t traded on national markets.
Stanford investors are now free to go after his law firms, service providers and insurance brokers, including SEI Investments.
Justices Anthony Kennedy and Samuel Alito dissented from the majority opinion, arguing that Stanford’s fraud was “in connection with the purchase or sale of a covered security” and therefore regulated under the law.