WASHINGTON, D.C. — (Mealey’s) Attorneys for Latin American investors in Stanford International Bank (SIB) and SIB’s insurance brokers and lawyers asked the U.S. Supreme Court on Oct. 7 to determine whether the Securities Litigation Uniform Standards Act (SLUSA) and the Securities Exchange Act of 1934 preclude investors from bringing private class actions based on state law “where the alleged purchase or sale of a covered security is ‘more than tangentially related’ to the ‘heart, crux or gravamen’ of the alleged fraud” (Chadbourne & Parke LLP v. Samuel Troice, et al., No. 12-79, Willis of Colorado Inc. v. Samuel Troice, et al., No. 12-86, Proskauer Rose LLP v. Samuel Troice, et al., No. 12-88, U.S. Sup.; See January 2013, Page 9).
Arguing for SIB insurance brokers Willis of Colorado Inc., Willis Group Holdings Ltd., Amy S. Baranoucky, Robert S. Winter, Bowen, Miclette & Britt Inc. and Willis Ltd., and SIB attorneys Proskauer Rose LLP, Thomas V. Sjoblom, Mauricio Alvarado and Chadbourne & Parke LLP, Paul D. Clement of Bancroft PLLC in Washington asked the Supreme Court to overturn a Fifth Circuit U.S. Court of Appeals ruling that allowed investors in R. Allen Stanford’s massive Ponzi scheme to file their securities claims in state court even though they allege a misrepresentation made “in connection with” the sale or purchase of a covered security.
“What is at issue here is not just a misrepresentation about holdings of securities. It is — they are misrepresentations about covered securities transactions. And more particularly, they are false promises to purchase covered securities for Plaintiffs’ benefit. And there are SEC [Securities and Exchange Commission] cases that are brought under those circumstances and as well there should be. Because when you sell something, whether it’s a noncovered security or something else based on a misrepresentation about covered securities, you trigger the interests of the SEC and SLUSA in a distinct way,” said Clement, a former U.S. solicitor general.
The justices questioned Clement as to what would constitute a noncovered security and whether SLUSA’s “in connection with” requirement governs when, as in the instant actions, the securities were never purchased as part of Stanford’s massive Ponzi scheme.
Arguing for the United States as amicus curiae, Assistant to the U.S. Solicitor General Elaine J. Goldenberg said, “We agree with the narrow formulation that Mr. Clement just gave, that the issue in this case is that it involves a false promise to purchase covered securities using the fraud victims’ money in a way that they are told is going to benefit them, and that that is a class securities fraud.”
Arguing for the Latin American investors, attorney Thomas Goldstein of Goldstein & Russell in Washington asked the Supreme Court to formulate an opinion “affirming and that . . . adopts the following rule, and that is, that a false promise to purchase securities for one’s self in which no other person will have an interest is not a material misrepresentation in connection with the purchase or sale of covered securities.”
“The other side has asked to you adopt a rule that has never been advocated by the SEC in any other proceeding; it’s never been advocated, as I understand it, in its briefs in this case; it’s never been adopted by any Court ever. And I think there are good reasons for that,” Goldstein said.
“Their theory is that what happened here is that there was a promise to buy covered securities that would be for the benefit of someone else. That has two textual flaws, it doesn’t comport with the purpose of the statute, and it would have extraordinary consequences.”
The Latin American investors filed two separate but related complaints in the U.S. District Court for the Northern District of Texas, alleging in one that Willis of Colorado; Willis Group Holdings; Baranoucky; Winter; Bowen, Miclette & Britt and Willis violated provisions of the Texas Securities Act and/or aided and abetted in the violation of the provisions of the Texas Securities Act by misrepresenting the investment quality of SIB’s certificates of deposit (CDs). An additional claim for civil conspiracy also was made.
In the other action, the investors alleged that Proskauer Rose, Sjoblom, Alvarado and Chadbourne & Parke aided and abetted in the violation of the Texas Securities Act.
Judge David C. Godbey, who oversaw the proceedings in both actions, dismissed the investors’ claims, and the investors appealed to the Fifth Circuit, which consolidated the actions with a third action and reversed and remanded.
Proskauer Rose, Chadbourne & Parke and Willis of Colorado each filed a petition for writ of certiorari in the Supreme Court, and on Oct. 1, the Supreme Court invited U.S. Solicitor General Donald B. Verrilli Jr. to file briefs expressing the views of the U.S. government.
The Supreme Court limited its review, though, restricting the questions presented in two of the actions, Proskauer Rose LLP v. Samuel Troice, et al. (No. 12-88, U.S. Sup.) and Chadbourne & Parke LLP v. Samuel Troice, et al. (No. 12-79, U.S. Sup.), to just one question each.
In Willis of Colorado Inc. v. Samuel Troice, et al. (No. 12-86, U.S. Sup.), the question presented is “whether a covered state law class action complaint that unquestionably alleges ‘a’ misrepresentation ‘in connection with’ the purchase or sale of a SLUSA-covered security nonetheless can escape the application of SLUSA by including other allegations that are farther removed from a covered securities transaction.”
In Proskauer Rose LLP v. Samuel Troice, et al. (No. 12-88, U.S. Sup.), the question presented is, “Does the Securities Litigation Uniform Standards Act of 1998, 15 U.S.C. [U.S. Code] §§ 77p(b), 78bb(f)(1), prohibit private class actions based on state law only where the alleged purchase or sale of a covered security is ‘more than tangentially related’ to the ‘heart, crux or gravamen’ of the alleged fraud?”
Finally, the question presented in Chadbourne & Parke LLP v. Samuel Troice, et al. (No. 12-79, U.S. Sup.) is “[w]hether SLUSA precludes a state-law class action alleging a scheme of fraud that involves misrepresentations about transactions in SLUSA-covered securities.”
Chadbourne & Parke is represented by Daniel J. Beller, Daniel J. Leffell and William B. Michael of Paul, Weiss, Rifkind, Wharton & Garrison in New York, Walter Dellinger and Jonathan D. Hacker in Washington and Anton Metlitsky in New York, all of O’Melveny & Myers. Proskauer Rose is represented by James P. Rouhandeh, Daniel J. Schwartz and Richard A. Cooper of Davis Polk & Wardwell in New York. Willis of Colorado is represented by Clement and Jeffrey M. Harris of Bancroft in Washington and Jonathan D. Polkes of Weil, Gotshal & Manges in New York.
The Latin American investors are represented by Edward C. Snyder and Jesse R. Castillo of Castillo Snyder in San Antonio; Edward F. Valdespino and Judith R. Blakeway of Strasburger & Price in San Antonio; P. Michael Jung and David N. Kitner of Strasburger & Price in Dallas; and Douglas J. Buncher and Nicholas A. Foley of Neligan Foley in Dallas.
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