The U.S. Supreme Court ruled today that a federal law which “forbids the bringing of large securities class actions based upon violations of state law” does not preclude the bringing of state class action suits against associates of billionaire financier Allen Stanford, who is currently serving a 110-year federal prison sentence for securities fraud.
At issue in Chadbourne & Parke LLP v. Troice is whether the the Securities Litigation Uniform Standards Act of 1998, which says plaintiffs may not bring a class action suit “based upon the statutory or common law of any State” when those plaintiffs allege “a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security,” precludes the state class actions filed in response to what has been described as Standford’s securities fraud "Ponzi scheme."
Writing for a 7-2 majority, Justice Stephen Breyer ruled today that federal law does not bar the state suits from proceeding. “The basic consequence of our holding,” Breyer wrote, “is that, without limiting the Federal Government’s prosecution power in any significant way, it will permit victims of this (and similar) frauds to recover damages under state law.”
Writing in dissent, Justice Anthony Kennedy, joined by Justice Samuel Alito, charged the majority with weakening federal protections for future investors victimized by securities fraud. “Today’s decision, to a serious degree, narrows essential protection for our national securities markets, protection vital for their strength and integrity,” Kennedy wrote. “The result will be a lessened confidence in the market, a force for instability that should otherwise be countered by the proper interpretation of federal securities laws and regulations.”
At a glance, today’s majority features an unusual ideological line-up, with conservatives such as Justice Clarence Thomas joining the decision of liberal Justice Stephen Breyer. But in fact Thomas has a well-established record of siding with the Court’s liberal bloc in what might be termed “regulatory federalism” cases. In 2009, for instance, Thomas sided with Justice John Paul Stevens’ 6-3 ruling in Wyeth v. Levine, which held that federal law did not preclude a state lawsuit filed against a pharmaceutical company. Two years later, in Williamson v. Mazda Motor of America, Inc., Thomas filed a concurrence explaining why the federal Motor Vehicle Safety Act should not trump a more restrictive California seat belt regulation. His vote in that case prompted one liberal legal advocate to describe Thomas as a “surprising ally for progressives.”
Today’s ruling in Chadbourne & Parke LLP v. Troice is available here.