Appeals court says Stanford investor suits can go forward

By Juan A. Lozano
Associated Press

HOUSTON — Investors who lost billions in a massive Ponzi scheme orchestrated by convicted former Texas tycoon R. Allen Stanford won a legal victory Monday as a federal appeals court decided to let their class action lawsuits go forward against individuals and companies they allege aided the financier’s fraud.

The 5th U.S. Circuit Court of Appeals overturned a federal judge’s ruling from last year that threw out three class action lawsuits that are trying to use state laws to recover investor losses resulting from Stanford’s scheme.

U.S. District Judge David Godbey in Dallas had thrown out the lawsuits, saying they were precluded under the Securities Litigation Uniform Standards Act, or SLUSA, a federal act that says class action suits related to securities fraud cannot be filed under state law. Godbey had determined the fraud alleged by the lawsuits — filed by investors in Texas and Louisiana — was connected to the purchase or sale of securities such as stock.

But a three-judge panel of the appeals court disagreed with Godbey, saying “we find that the (alleged) fraudulent schemes … are not more than tangentially related to the purchase or sale of covered securities and are therefore not sufficiently connected (to) purchases or sales to trigger SLUSA preclusion.”

Stanford was convicted earlier this month on 13 fraud-related charges for misusing money from investors who bought certificates of deposit, or CDs, from his Caribbean bank to pay for his businesses and his lavish lifestyle.

The appeals court found that while Stanford had promoted his bank’s investment portfolio as being backed by securities like stocks, this claim only had a minor connection to the heart of the financier’s fraud.

Angela Shaw, who founded the Stanford Victims Coalition, which represents investors, said if Godbey’s ruling had been upheld, it probably would have meant that all class action lawsuits filed by Stanford investors would have been dismissed.

The judge is in charge of all suits filed in connection with the civil action in Dallas by the U.S. Securities and Exchange Commission against the convicted financier.

Shaw, who is part of a committee appointed by Godbey to represent the interests of the more than 20,000 investors who lost money, said the class action lawsuits under state law will allow investors to pursue certain civil damages they could not do under federal law.

Investors can now pursue lawsuits against third parties they believe aided Stanford’s fraud, including banks, lawyers and auditors, she said.

“The primary source of recovery for the victims is litigation,” said Shaw, who along with her husband lost $2 million in Stanford’s scheme. There would have been no litigation if Godbey’s decision had been upheld.”

So far, only about $115 million has been recovered for investors by a court-appointed receiver.

Stanford, 61, is set to be sentenced on June 14 and could spend the rest of his life behind bars.

The jury that convicted Stanford also cleared the way for U.S. authorities to go after $330 million in stolen investor funds sitting in his frozen foreign bank accounts.