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 state law.

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 securities.

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 swindlers.

"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 investors' claims.

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 disagreed.

"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 intent.

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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