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Allen Stanford Fraud Suits Draw U.S. High Court Inquiry

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Oct. 1 (Bloomberg) -- The U.S. Supreme Court signaled interest in using a case involving investors in R. Allen Stanford’s $7 billion Ponzi scheme to spell out the reach of a 1998 law aimed at limiting securities-fraud lawsuits.

The justices today sought the Obama administration’s advice on appeals of a ruling that let aggrieved investors sue law firms and outside companies for their alleged roles in Stanford’s international fraud. The issue in the case also has arisen in suits stemming from Bernard Madoff’s fraud.

Should the court take up the case, it would test a law enacted to prevent investors from using state courts to circumvent federal restrictions on class-action securities claims. Federal law prohibits punitive damages, requires higher levels of proof than many state laws and bars “aiding and abetting” suits.

The 1998 law, known as the Securities Litigation Uniform Standards Act, or SLUSA, bars investors from using state law to file class-action lawsuits if the case is based on a misrepresentation made “in connection with the purchase or sale of a covered security.”

The question in the appeals is how close that connection must be to bar a state lawsuit. Lower courts have established a variety of tests.

The Supreme Court cases are Chadbourne & Park v. Troice, 12-79; Willis v. Troice, 12-86; and Proskauer Rose v. Troice, 12-88.

To contact the reporter on this story: Greg Stohr in Washington at gstohr@bloomberg.net

To contact the editor responsible for this story: Steven Komarow at skomarow1@bloomberg.net