In a 7-2 ruling on February 26, 2104, the U.S. Supreme Court issued an opinion that affects many victims who lost billions of dollars in an infamous Ponzi-structured scheme spearheaded by Texas investment banker Allen Stanford. The Court found that the Ponzi scheme investors can sue in state courts, opening the door for these individuals a chance at retribution.
Briefly, the CDs offered by Stanford for investment purposes did not qualify as “covered securities” under federal law. Therefore, the victims’ claims are not blocked by rules, which grant sole jurisdiction over securities fraud cases to the federal court system. The court stated that the law denying investors the right to pursue their interests in state court does not apply to Stanford’s Ponzi scam, as it applies only to tangible investments. The Stanford offerings were imagined in nature, as they had no actual financial backing.
The Supreme Court decision is welcome news to investors who have waited a long time to be given the go-ahead to sue in their home states. Oral arguments in the case were heard on the first day of the court’s term in Fall 2013. The announcement of the ruling is considered a victory, and now Ponzi scheme investors can sue in state courts in an attempt to recoup losses.
Details About Allen Stanfords Ponzi Scheme
The details of the scheme were revealed in court documents and oral arguments, and is reminiscent of the Ponzi scheme notoriously organized by Bernard Madoff.
- The Stanford International Bank, based offshore on Antigua, sold approximately $7 billion in undervalued or valueless certificates of deposit.
- More than 25,000 people purchased the worthless CDs over a period of 15 years.
- Stanford and his associates submitted forged financial documents to securities regulation organizations and defrauded regulators about the financial condition of the Stanford International Bank.
- Thousands of investors lost their pensions and life savings, including vulnerable groups like retirees and small business owners.
- While Stanford was arrested in 2009 and convicted in 2012, the 110-year sentence he’s serving in a Florida federal prison does not compensate victims for their losses.
The scheme’s reliance on bogus CDs that were not backed by actual assets is the reason for the Supreme Court’s finding. As the author of the majority opinion, Justice Stephen Breyer pointed out the distinction made by the term “covered security.” His finding that damages are available in state court is a relief to the defrauded investors. Justices Anthony Kennedy and Samuel Alito dissented; stating that the ruling would limit the authority of the SEC. Breyer’s opinion countered this assertion, finding that it would not limit the federal government’s prosecution powers in similar cases.
Now, Ponzi scheme investors can sue in state courts because their investments are not considered to be covered securities under federal securities law. The opponents in the case included financial institutions, banks, law firms and insurance agencies accused of supporting Stanford in his plot. Their arguments centered on the fraudulent statements made by Stanford about the security transactions, which would require application of federal jurisdictional rules.
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Veriti Consulting LLC provides professional ponzi scheme investigation services across the U.S. Veriti is also a licensed private investigation agency. Learn more about our fraud auditing and forensic accounting services by calling 855.232.4410 or contact us via email.
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