Law firms that represented and advised
convicted Ponzi-schemer Allen Stanford may be on the hook for
millions of dollars lost in the bogus investment scheme and
could face class actions by investors seeking to recoup losses.
On Monday, the U.S. Court of Appeals for the 5th Circuit
ruled that federal securities law does not prevent state class
actions against lawyers and firms accused of helping Stanford.
The ruling overturns a lower-court decision holding that the
Securities Litigation Uniform Standards Act, or SLUSA, prevents
class actions alleging securities fraud from being brought under
The 5th Circuit decision is a setback for the New York-based
law firms Proskauer Rose and Chadbourne & Parke as well as
attorney Thomas Sjoblom, who worked at both firms. The class
actions, filed under state law, accuse Sjoblom, Stanford's
former lawyer, of obstructing an investigation by the Securities
and Exchange Commission. They also allege that Proskauer and
Chadbourne were negligent for employing Sjoblom and that the
firms are responsible for his wrongdoing.
The appeals court's decision turned on the relationship
between the alleged fraud and the purchase or sale of
Plaintiff investors filed the cases under state law because
they had little other choice. Federal law does not allow
plaintiffs to bring claims for negligence or claims for aiding
and abetting fraud. What's more, the 2008 Supreme Court case,
Stoneridge v. Scientific-Atlanta, created barriers to using
federal securities law to sue law firms that represented accused
"When you have a case like this, suing aiders and abettors,
the only way to do it is to sue under state law," said Edward
Snyder, a lawyer for the investors, who filed the 5th Circuit
suit under Texas law.
Yet SLUSA, passed in 1998, prevents fraud suits involving
nationally-traded securities from being brought under state law.
Proskauer, Chadborne, Sjoblom and other defendants in the 5th
Circuit case had tried to use SLUSA to block the Stanford
In Ponzi schemes such as Stanford's, investors are often
betting on some kind of uncovered security, such as a
certificate of deposit or feeder fund. Therefore, much of the
courtroom wrangling has centered on the meaning of the phrase,
"in connection with" a covered security.
In October, Dallas federal judge David Godbey ruled that
SLUSA did preclude state law class actions. Godbey found that
investors were led to think that they were investing in
certificates of deposit with a bank whose portfolio included
covered securities. In addition, many of the investors sold
securities to invest in the CDs. Those facts were enough to bar
the case under SLUSA, Godbey ruled. But the 5th Circuit
"The misrepresentations made by the Proskauer Defendants are
not more than tangentially related to the purchase or sale of
covered securities and therefore, SLUSA preclusion does not
apply," Judge Edward Prado wrote for the three-judge panel.
The 5th Circuit is the first federal appeals court to
address whether SLUSA applies in the context of a Ponzi scheme,
according to Phillip Preis, a lawyer for some of the investors.
The panel did consider several conflicting decisions from a
federal court in the Southern District of New York, related to
the Bernard Madoff Ponzi scheme. The 2nd Circuit has yet to rule
in any of those cases.
"In the whole area of Ponzi schemes, it's an important
decision," said the plaintiffs' lawyer Snyder. He said judges
have tended to expand the reach of SLUSA to block class actions
over the years. "Finally, the 5th circuit stood up and put up a
firewall," he said, adding that the decision allows a separate
class action against law firm Adams and Reese to also proceed.
In a statement, Proskauer said it still has numerous other
defenses at its disposal that the court did not consider.
Chadbourne said in a statement, "We moved to dismiss this
case on many grounds, not just SLUSA... The district court will
now have to address all those other issues."
The defendants have argued that they have immunity because
they were acting as counsel to Stanford. They also claim that
they had no duty to Stanford's investors and no fraudulent
Sjoblom, who was an assistant chief litigation counsel at
the SEC from 1987 to 1999, declined to comment on the
litigation. He was a partner at Proskauer from 2006 to 2009 and
at Chadbourne from 2002 to 2006, according to the website of the
Law Office of Thomas V. Sjoblom in Washington, D.C.
The investors' class action against the law firms and
Sjoblom is Troice et al v. Proskauer Rose et al, U.S. Court of
Appeal for the 5th Circuit, No. 11-11031.
For the plaintiffs: Edward Snyder of Castillo Snyder.
For Proskauer: James Rouhandeh of Davis Polk & Wardwell.
For Chadbourne: Daniel Beller of Paul, Weiss, Rifkind,
Wharton & Garrison.
For Sjoblom: Mindy Caplan of McKenna, Long & Aldridge;
William Mateja of Fish & Richardson.
(Reporting By Terry Baynes)
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