Supreme Court Allows State Class Actions to Proceed Against Security Fraud ‘Ponzi Scheme’

The U.S. Supreme Court ruled today that a federal law which
“forbids the bringing of large securities class actions based upon
violations of state law” does not preclude the bringing of state
class action suits against associates of billionaire financier
Allen Stanford, who is currently serving a 110-year federal prison
sentence for securities fraud.

At issue in Chadbourne & Parke LLP v. Troice is
whether the the Securities Litigation Uniform Standards Act of
1998, which says plaintiffs may not bring a class action suit
“based upon the statutory or common law of any State” when those
plaintiffs allege “a misrepresentation or omission of a material
fact in connection with the purchase or sale of a covered
security,” precludes the state class actions filed in response to
what has been described as Standford’s securities fraud “Ponzi
scheme.”

Writing for a 7-2 majority, Justice Stephen Breyer ruled today
that federal law does not bar the state suits from proceeding. “The
basic consequence of our holding,” Breyer wrote, “is that, without
limiting the Federal Government’s prosecution power in any
significant way, it will permit victims of this (and similar)
frauds to recover damages under state law.”

Writing in dissent, Justice Anthony Kennedy, joined by Justice
Samuel Alito, charged the majority with weakening federal
protections for future investors victimized by securities fraud.
“Today’s decision, to a serious degree, narrows essential
protection for our national securities markets, protection vital
for their strength and integrity,” Kennedy wrote. “The result will
be a lessened confidence in the market, a force for instability
that should otherwise be countered by the proper interpretation of
federal securities laws and regulations.”

At a glance, today’s majority features an usual ideological
line-up, with conservatives such as Justice Clarence Thomas joining
the decision of liberal Justice Stephen Breyer. But in fact Thomas
has a well-established record of siding with the Court’s liberal
bloc in what might be termed “regulatory federalism” cases. In
2009, for instance, Thomas sided with Justice John Paul Stevens’
6-3 ruling in Wyeth
v. Levine, which held that federal law did not preclude a
state lawsuit filed against a pharmaceutical company. Two years
later, in Williamson
v. Mazda Motor of America, Inc., Thomas filed a
concurrence explaining why the federal Motor Vehicle Safety Act
should not trump a more restrictive California seat belt
regulation. His vote in that case prompted one liberal legal
advocate to describe
Thomas as a “surprising ally for progressives.”

Today’s ruling in Chadbourne & Parke LLP v. Troice
is available here.