The U.S. Supreme Court’s recent decision in Chadbourne & Parke, LLC v. Troice, 571 U.S. ___ (2014) arose out of the a multibillion dollar Ponzi scheme perpetrated by Allen Stanford. The scheme involved the sale to investors of certificates of deposit in Stanford International Bank. Mr. Stanford was convicted of mail fraud, wire fraud, conspiracy to commit money laundering, and obstruction of a Securities and Exchange Commission investigation. The SEC also won an award of $6 billion in a civil action. The case involved several groups of plaintiffs who filed suit in state and federal courts. This post focuses on the allegations in the suit filed in the Texas federal court against the Proskauer Rose LLP law firm – that the firm allegedly misrepresented to the SEC the SEC’s ability to exercise its oversight over Stanford and SIB. Notably, the plaintiffs did not allege that the law firm made misrepresentations to them or was involved in selling the CDs or perpetuating the Ponzi scheme. Instead, they asserted aiding and abetting liability under Texas’ securities law and common law.
In a 7-2 opinion written by Justice Breyer the Supreme Court held that the Securities Litigation Uniform Standards Act (SLUSA) did not apply to “a class action in which the plaintiffs allege (1) that they ‘purchase[d]’ uncovered securities (certificates of deposit that are not traded on any national exchange), but (2) that the defendants falsely told the victims that the uncovered securities were backed by covered securities.” Had the SLUSA applied, it would have prevented the plaintiff from maintaining a class action based on the statutory or common law of any state. 15 U. S. C. §78bb(f)(1) (I’m greatly over-simplifying here).
I’m not familiar with Texas’ aiding or abetting laws and it remains to be seen whether the plaintiffs will prevail on the merits of their claims. Nonetheless, the case has very disturbing implications for any lawyer who undertakes to represent a company or individual that is subject to a government investigation. It should be of even greater concern to those hiring counsel. Not everyone who is subject to investigation is guilty. If defending a client in an investigation creates an overwhelming financial risk to legal counsel, there will be no defenders and no defenses.