Supreme Court case impacting Stanford victims to decide Ponzi scheme law 'for years to come,' attorney says

Supreme Court case impacting Stanford victims to decide Ponzi scheme law 'for years to come,' attorney says




On the first Monday in October, the U.S. Supreme Court is scheduled to hear arguments in a case that could have a major impact as to whether local Stanford Group victims finally will be compensated, says local attorney Phil Preis. Preis won at the Fifth Circuit Court of Appeals the right to pursue in state court a class action suit against law firms and financial services companies that he argues enabled the infamous Ponzi scheme.



Put simply, state law allows for a negligence claim, while federal law would require investors prove knowledge of the fraud, a much higher bar. Tom Goldstein, a prominent Washington, D.C. attorney and publisher of SCOTUSblog, will argue before the high court that the Fifth Circuit's decision should stand.



"This is going to establish the law on Ponzi schemes in the United States for years to come," Preis says.



A U.S. Securities and Exchange Commission administrative law judge recently handed down a decision saying that three former Stanford executives violated antifraud provisions of federal securities laws. The judge says the executives might not have known about Allen Stanford's scheme, but says they ignored numerous red flags. While that line of reasoning seems to support Preis' argument, the SEC opposes the investors' position.



Preis suggests the SEC is backing what Goldstein calls a "newfound interpretation of the securities laws" to broaden its enforcement power "at the expense of backing the Stanford victims." The SEC has jurisdiction over any fraud "in connection with" a covered security; the question is, how broadly should that phrase be interpreted?




Preis argues that since the Stanford financial products local investors bought were not sold on the New York Stock Exchange, state law should apply. He adds that the case could present an interesting dilemma for conservative justices forced to choose between siding with class action plaintiff attorneys and expanding the reach of a federal agency.



The SEC is supporting a separate effort by investors, which Preis says is scheduled to be heard by a Washington, D.C., appeals court next month, to obtain up to $500,000 in compensation from the Securities Investor Protection Corporation, or SIPC.



Preis says he was surprised the Supreme Court accepted his case, rather than one tied to the Bernie Madoff Ponzi scheme.



"Everybody says, 'That's great. You're going to be able to argue before the Supreme Court,' " Preis says. "I won it at the Fifth Circuit. I would much rather they had not accepted the writ to review it."



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