Case Could Expose Law Firms to Liability for Frauds
Clement asserts in his brief on behalf of Willis and other third-party companies that his clients provided routine services to Stanford's operations, "completely unrelated" to the certificates that formed the basis of the fraud. Willis never profited from the Ponzi scheme, Clement added. And he accused the plaintiffs of seeking out "deep-pocketed third parties with any remote connection to Stanford." Walter Dellinger of O'Melveny & Myers, representing Chadbourne, told the court the plaintiffs were making an "end-run" around the intent of Congress to bar suits against third parties.
The third-party defendants also invoked two Supreme Court precedents—Merrill, Lynch, Pierce, Fenner & Smith v. Dabit, 547 U.S. 71, a 2006 decision, and Stoneridge v. Scientific-Atlanta, 552 U.S. 148, in 2008, both of which point toward a broad reading of federal laws that would prevent class actions based on state law.
The defense bar asserts that allowing the Fifth Circuit ruling to stand would only speed the forum-shopping rush to state courts that began after SLUSA and its predecessor, the Private Securities Litigation Reform Act, were passed. Coberly said that in her own practice defending auditors in securities actions, most of the litigation has been filed under state law. She said that existing federal law gives the government all the tools needed to prosecute legitimate cases against participants in a fraud, without allowing class actions to proliferate at the state level.
Another brief offers an example of the kind of litigation that law firms are worried about. Other Stanford investors sued the Louisiana law firm Breazeale, Sachse & Wilson in federal court but under Texas state law over partner Claude Reynaud Jr.'s role as one of many of Stanford's outside counsel.
The Breazeale firm's brief, written by Arnold & Porter's Lisa Blatt, says the lawsuit seeks to hold the firm liable for at least $300 million and "potentially all of the financial losses resulting from the entire Stanford Ponzi scheme" under a state theory of joint and several liability. Because of the Fifth Circuit's stance, Blatt said, the Louisiana firm has been unable to seek dismissal of the lawsuit.
The Roberts Court has generally supported efforts to curtail class actions. But the issue keeps returning, no matter what laws Congress passes, and the outcome in the Stanford-related cases is uncertain. The uncertainty of the law and the abusive nature of class actions, according to Coberly, "drives up the cost of doing business in the United States and reduces the competitiveness of U.S. capital markets."
The court is also being told that the defendants in the three Stanford cases are not necessarily innocent bystanders or far-removed players who deserve to be protected from liability.
A brief filed by the court-appointed receiver and examiner in the Stanford fraud case details the role Sjoblom allegedly played in using his credentials as a former SEC attorney to forestall SEC investigations into Stanford's operations. It also recites allegations that Willis provided "safety and soundness letters" to Stanford from 1996 through 2008 that attracted thousands of investors to Stanford's offerings.
@|Tony Mauro covers the U.S. Supreme Court for ALM, the parent company of the Law Journal. He can be contacted at email@example.com.