|Allen Stanford. Photo from Wikipedia.|
Discussion: In 2012, Allen Stanford was convicted of cheating investors out of more than $7 billion over 20 years in one of the largest Ponzi schemes in U.S. history. Three cases sough to use state class-actions to attempt to recover damages for losses resulting from the Stanford Ponzi scheme. On the other hand, a preclusion provision of the Securities Litigation Uniform Standards Act ("SLUSA") provides that "[n]o covered class action based upon the statutory or common law of any State or subdivision thereof may be maintained in any State or Federal court by any private party alleging a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security" (emphasis added). The district court dismissed the claims, finding that they were precluded by the SLUSA provision. The Fifth Circuit then reversed, holding that that the purchase or sale of securities (or representations about the purchase or sale of securities) was only tangentially related to the fraudulent scheme, and thus the preclusion provision did not apply.
Issue: The questions before the Court were (1) whether the Securities Litigation Uniform Standards Act (SLUSA) precludes a state-law class action alleging a scheme of fraud that involves misrepresentations about transactions in SLUSA-covered securities; and (2) whether SLUSA precludes class actions asserting that defendants aided and abetted SLUSA-covered securities fraud when the defendants themselves did not make misrepresentations about the purchase or sale of SLUSA-covered securities.
Holding: In a 7-2 decision, the Supreme Court ruled that SLUSA does not preclude the plaintiff's state-law class actions, because SLUSA only applies when the plaintiffs allege a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security. Since the plaintiffs did not allege such in this case, the Court affirmed the lower court's decision.