Stanford Victims’ Suit Over SEC Handling of Probe Tossed

Two of R. Allen Stanford’s investors lost a bid to hold the federal government liable for the U.S. Securities and Exchange Commission’s alleged failure to tell another agency the financier’s business was in trouble.

The investors sued the U.S. two years ago claiming the SEC failed in its statutory duty to tell the Securities Investor Protection Corp. it suspected Stanford was running a fraud scheme before suing him in February 2009.

Stanford, 63, was later indicted. He was found guilty last year of running a $7 billion Ponzi scheme and is serving a 110-year prison sentence. Yesterday, a U.S. judge in Fort Lauderdale, Florida, ruled the federal government is immune from the investors’ suit.

“The plaintiffs claim is that they were induced into entering disadvantageous business transactions because of the SEC’s misrepresentation,” U.S. District Judge Robert N. Scola Jr. said in his ruling.

That type of claim isn’t allowed by the Federal Tort Claims Act, which sets forth under what circumstances the U.S. will let itself be sued, Scola said. Scola last year denied a defense bid for dismissal of the case, accepting as true at the time that the SEC had a duty to inform SIPC of its concerns.

SEC Probes

The SEC probed Houston-based Stanford Group Co. four times from 1997 and 2004, according to the investors’ revised complaint filed last year. While suspecting the business was a Ponzi scheme, with early investors paid from funds of those who followed, the agency took no action until 2009.

Plaintiff Carlos Zelaya invested $1 million with Antigua-based Stanford International Bank Ltd., losing almost all of it, while co-plaintiff George Glantz Revocable Trust lost almost all of a $650,000 investment, according to the complaint.

Their lawyer, Gaytri Kachroo of Cambridge, Massachusetts, didn’t immediately reply to a voice-mail requesting comment on the court’s decision. Kevin Callahan, a spokesman for the SEC, declined to comment.

Stanford investors lost about $5.1 billion in the scheme.

The case is Zelaya v. U.S., 11-cv-62644, U.S. District Court, Southern District of Florida (Miami).

To contact the reporter on this story: Andrew Harris in Chicago federal court at aharris16@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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