Lawsuits over Stanford Ponzi Scheme Move Forward on Both Civil and Criminal Fronts

Several different groups of investors have filed suits against various third parties based upon various state law claims. The defendants, at least in two of these suits, include SEI Investments Company, the Stanford Trust Company, the Trust's employees, and the Trust's investment advisors, among others, for their alleged role in the Stanford Ponzi scheme. The plaintiffs alleged violations of state law including breach of contract, negligent representation, breach of fiduciary duty, unfair trade practices, and violations of state securities acts.

The defendants to the suits challenged them on the basis of the courts in which they were filed; there is a federal statute, the Securities Litigation Uniform Standards Act, which states that “[n]o covered class action based upon the statutory or common law of any State or subdivision thereof may be maintained in any State or Federal court by any private party alleging a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security.” 15 U.S.C. § 78bb(f)(1)(A). In simpler terms, this statute requires any class action which is alleging some sort of fraud in connection with the sale of “covered securities” to be brought only in Federal court, and only under a specific set of standards which apply only to securities class actions in Federal court. Defendants in one case sought to have the case dismiss altogether, and in the other case to have the case removed from the state court and tried in federal court under these different, and significantly more difficult for the plaintiffs, standards.

In order for the claims to be able to stay in state court, the claims cannot be based upon fraud in connection with the sale of a “covered security.” In these cases, the plaintiffs actually included claims for violations of the applicable state securities statutes, which would indicate some level of belief that there was securities fraud which occurred. However, although it is somewhat counterintuitive, a “covered security” under the federal law and a security under the state securities laws are not necessarily one and the same.

Initially, the district court which heard this challenge ruled that the federal statute did apply. Even though investors were actually purchasing CDs, which are not registered securities to be covered under the Federal law, the investors were told that Stanford’s company would use that money to invest in other things which were registered securities. The district court determined that this, among other connections, were sufficient to invoke the Securities Litigation Uniform Standards Act and precluded these claims from being brought in state court. This decision was appealed to the 5th Circuit United States Court of Appeals.

The 5th Circuit reversed the district court and ordered that these cases be permitted to move forward as originally filed in their respective state courts. The court relied heavily on statements of the Federal law’s original purpose, which, according to the sources cited by the court, is to make Federal courts the exclusive venue for securities fraud class actions involving nationally traded securities. Accordingly, the 5th Circuit concluded that holding that these suits could not move forward would be contradictory of the law’s intent.

However, the debate continues as the U.S. Supreme Court has granted certiorari over the dispute, which means that the court will hear a further appeal over the same issue. (The U.S. Supreme Court is not required to hear most appeals; the court has discretion to choose what issues are substantial enough to warrant the final level of appellant review.) As such, the investors trying to recover their losses here are put on hold once again while the Supreme Court weighs in.

On the criminal front, more Stanford executives are being sentenced to jail time. James M. Davis, the former chief financial officer, or CFO, of Stanford’s companies, was sentenced to 5 years in prison for his role in the fraud. Davis, who gave substantial testimony against Stanford himself in Stanford’s criminal trial, had faced up to 30 years in prison for the charges of fraud and conspiracy that he pled guilty to. Davis admitted that he lied to investors about the company carrying insurance, as well as coving up the losses by fabricating the bank’s financial information and bank statements. However, because of his testimony against Stanford, who received a 110 year sentence, Davis appears to have been given a substantially reduced sentence.

Other executives that have been held criminally responsible at this point include Laura Pendergest-Holt, the company’s chief investment officer, who was sentenced to three years in prison. She pled guilty to a single count of obstruction of a U.S. Securities and Exchange Commission proceeding. Gilbert Lopez, the company’s chief accounting officer, and Mark Kuhrt, the global controller, were both convicted of conspiracy to commit wire fraud and nine-counts of wire fraud. They are set to be sentenced later in February 2013.

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