SEC wins dismissal of lawsuit over handling of $7 bln Stanford fraud

Published: Tuesday, 13 Aug 2013 | 12:40 PM ETBy: Jonathan Stempel



* SEC protected by exception to Federal Tort Claims Act

* Victims say SEC knew of Stanford Ponzi scheme in 1997

* Stanford serving 110-year prison term for $7.2 bln fraud

Aug 13 (Reuters) - A federal judge in Florida has thrown out a lawsuit accusing the U.S. Securities and Exchange Commission of negligence for failing to report that the now-imprisoned swindler Allen Stanford was running a $7.2 billion Ponzi scheme.

U.S. District Judge Robert Scola in Miami said the market regulator was shielded under an exception to the Federal Tort Claims Act that bars claims arising from misrepresentation or deceit.

The plaintiffs, Carlos Zelaya and George Glantz, said they lost a combined $1.65 million with Stanford, and sought class-action status on behalf of investors who were victims of his fraud. They plan to appeal Monday's decision, their lawyer Gaytri Kachroo said. SEC spokesman Kevin Callahan declined to comment.

Stanford, 63, is serving a 110-year prison sentence after he was convicted on criminal charges in March 2012 for a fraud that the government said was centered in certificates of deposit issued by his Antigua-based Stanford International Bank.

Zelaya and Glantz claimed that the SEC considered Stanford's business a fraud after each of four examinations between 1997 and 2004, but failed to advise the Securities Investor Protection Corp, which compensates victims of failed brokerages.

The SEC filed civil charges against Stanford in February 2009, two months after the multibillion-dollar Ponzi scheme of New York-based swindler Bernard Madoff was uncovered. In a typical Ponzi scheme, investors are promised high or consistent returns relative to the amount of risk taken, and older investors are paid with money from newer investors.

Last September, Scola let the lawsuit against the SEC go forward, saying the plaintiffs could argue that the regulator had breached a duty to report Stanford's misconduct.

But on Monday, he said the FTCA exception barring claims of misrepresentation deprived him of jurisdiction.

"The plaintiffs claim that they were induced into entering disadvantageous business transactions because of the SEC's misrepresentation," he wrote. "The plaintiffs' cause of action is a classic claim for misrepresentation."

Their lawyer Kachroo said: "We believe that the judge did not draw the appropriate distinction between a claim based on a misrepresentation and our claim based on a failure to warn in line with the SEC's mandatory duty to notify SIPC."

In 2010, the SEC's inspector general criticized the regulator, finding that it knew as early as 1997 that Stanford was likely running a Ponzi scheme.

Earlier this year, federal appeals courts in New York and California dismissed lawsuits against the SEC by victims of Madoff's fraud.

The case is Zelaya et al. v. U.S., U.S. District Court, Southern District of Florida, No. 11-62644.

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For a full and open debate on the Stanford Receivership visit the Stanford International Victims Group - SIVG official forum http://sivg.org/forum/

Stanford Victims’ Suit Over SEC Handling of Probe Tossed

Stanford Victims’ Suit Over SEC Handling of Probe Tossed
By Andrew Harris - Aug 13, 2013 3:30 PM CT

Two of R. Allen Stanford’s investors lost a bid to hold the federal government liable for the U.S. Securities and Exchange Commission’s alleged failure to tell another agency the financier’s business was in trouble.

The investors sued the U.S. two years ago claiming the SEC failed in its statutory duty to tell the Securities Investor Protection Corp. it suspected Stanford was running a fraud scheme before suing him in February 2009.

Stanford, 63, was later indicted. He was found guilty last year of running a $7 billion Ponzi scheme and is serving a 110-year prison sentence. Yesterday, a U.S. judge in Fort Lauderdale, Florida, ruled the federal government is immune from the investors’ suit.

“The plaintiffs claim is that they were induced into entering disadvantageous business transactions because of the SEC’s misrepresentation,” U.S. District Judge Robert N. Scola Jr. said in his ruling.

That type of claim isn’t allowed by the Federal Tort Claims Act, which sets forth under what circumstances the U.S. will let itself be sued, Scola said. Scola last year denied a defense bid for dismissal of the case, accepting as true at the time that the SEC had a duty to inform SIPC of its concerns.

SEC Probes
The SEC probed Houston-based Stanford Group Co. four times from 1997 and 2004, according to the investors’ revised complaint filed last year. While suspecting the business was a Ponzi scheme, with early investors paid from funds of those who followed, the agency took no action until 2009.

Plaintiff Carlos Zelaya invested $1 million with Antigua-based Stanford International Bank Ltd., losing almost all of it, while co-plaintiff George Glantz Revocable Trust lost almost all of a $650,000 investment, according to the complaint.

Their lawyer, Gaytri Kachroo of Cambridge, Massachusetts, didn’t immediately reply to a voice-mail requesting comment on the court’s decision. Kevin Callahan, a spokesman for the SEC, declined to comment.

Stanford investors lost about $5.1 billion in the scheme.

The case is Zelaya v. U.S., 11-cv-62644, U.S. District Court, Southern District of Florida (Miami).

To contact the reporter on this story: Andrew Harris in Chicago federal court at aharris16@bloomberg.net

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For a full and open debate on the Stanford Receivership visit the Stanford International Victims Group - SIVG official forum http://sivg.org/forum/

SEC Escapes Stanford Victims' Suit Over $7B Ponzi Scheme

SEC Escapes Stanford Victims' Suit Over $7B Ponzi Scheme

Law360, New York (June 21, 2013, 9:54 PM ET) -- A Louisiana judge Friday threw out a putative class action alleging the U.S. Securities and Exchange Commission facilitated Robert Allen Stanford's $7 billion Ponzi scheme, finding the agency was shielded by a law barring suits over federal officials' discretionary choices.

U.S. District Shelly D. Dick said the discretionary function exception of the Federal Tort Claims Act applied to the case brought by victims of Stanford in part because the alleged refusal of former official Spencer Barasch in the SEC's Fort Worth, Texas, office to investigate the Ponzi scheme was a matter of choice.

“While the Court sympathizes with the losses suffered by the plaintiffs in this matter, plaintiffs have failed to identify any mandatory obligations violated by SEC employees in the performance of their discretionary duties,” Judge Dick concluded in granting the government's motion to dismiss.

“Plaintiff[s] have also failed to allege facts demonstrating that the challenged actions are not grounded in public policy considerations,” she said.

The plaintiffs argued that Barasch's alleged conduct did not fall under the discretionary function exception because the SEC has a policy of making enforcement referrals to the National Association of Securities Dealers and the Texas State Securities Board. Therefore, if a decision was made to refer Stanford, and then not followed, that decision falls outside the discretionary function exception.

But Judge Dick rejected that argument, saying that while “the alleged conduct of Barasch is disturbing ... the FTCA clearly states that the discretionary function exception applies 'whether or not the discretion involved be abused.'”

The suit, which was filed in July under the FTCA, alleged that SEC employees in Fort Worth knew as early as 1997 — only two years after Stanford Group Co. registered with the agency — that the company was likely operating a Ponzi scheme and did nothing about it.

Former SEC regional enforcement director Barasch, now an attorney with Andrews Kurth LLP, was singled out in the complaint for failing in his duties.

"In 1998 [to NASD] and again in 2002 [to TSSB] the SEC — through enforcement director Barasch and others — reached the conclusion that referrals should be made. Barasch himself was designated to perform these tasks," the complaint said. "But, in fact, these referrals were not made, with the effect that Stanford escaped scrutiny by other agencies for years, thus facilitating Stanford's scheme to defraud."

In dismissing the case, Judge Dick cited a similar decision by a Texas federal judge in another case brought against the SEC over Stanford's scheme. The plaintiffs in Dartez v. U.S. had argued that Barasch's decisions and the negligent supervision of his superiors were not protected policy considerations.

“While the [Dartez] decision is not binding on this Court, the Court can find no flaw in [its] reasoning,” Judge Dick said.

The plaintiffs are represented by C. Frank Holthaus, Scott H. Fruge, Michael C. Palmintier and John W. DeGravelles of DeGravelles Palmintier Holthaus & Fruge and Edward J. Gonzales III.

The case is Anderson et al. v. United States of America, number 3:12-cv-00398, in the U.S. District Court for the Middle District of Louisiana.

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For a full and open debate on the Stanford Receivership visit the Stanford International Victims Group - SIVG official forum http://sivg.org/forum/