February 28th, 2014
Steve Ma was quoted in Stephanie Russell-Kraft’s Law360 article titled “”Proskauer, Chadbourne Could Face Billions In Damages.”
Law360, New York (February 26, 2014, 10:16 PM ET) — The liability headache has only just begun for Proskauer Rose LLP and Chadbourne & Parke LLP, which now face potentially billions of dollars in damages after the Supreme Court ruled Wednesday that victims of Robert Allen Stanford’s Ponzi scheme can sue the law firms over their alleged role in the scheme.
In a 7-2 decision Wednesday, the Supreme Court resolved a circuit split over the application of the federal Securities Litigation Uniform Standards Act, which bars state-law class actions alleging fraud “in connection with” the sale of a security traded on a national exchange. The high court upheld a Fifth Circuit ruling that the victims’ claims were not barred by SLUSA because the alleged misrepresentations about covered securities were only “tangentially related” to the Ponzi scheme.
According to the class of investors, the firms helped Stanford falsely represent that its certificates of deposit, which were not covered by SLUSA, were backed by safer, covered securities.
The ruling marked a significant defeat for Proskauer Rose and Chadbourne & Parke, putting a class action against them back into play in a Texas district court, where they will be subjected to “more pro-investor” Texas securities laws that let plaintiffs sue gatekeepers for their roles in aiding and abetting securities fraud, according to attorney Edward C. Snyder, who represents the plaintiffs.
“For the firms, this means significantly more legal costs, negative publicity, and, potentially, depending on how the cases go, more exposure,” said H. David Kotz, who authored the report on Stanford’s Ponzi scheme when he served as inspector general of the SEC.
Attorneys were reluctant to speculate on the amount of damage the Stanford liability case could do to Proskauer Rose and Chadbourne & Parke, but the worst-case scenario — damages in the billions — could be debilitating, if not worse. The investors have argued that Stanford wouldn’t have been able to sell them the fraudulent securities without the help of Proskauer Rose and Chadbourne & Parke, which Houston-based litigator Tom Ajamie finds difficult to dispute
“If Stanford didn’t have lawyers, the fraud couldn’t have been committed, period,” Ajamie said. “Lawyers are integral parts of financial fraud and they need to be held accountable for what they do.”
Having passed the “major roadblock” of a Supreme Court appeal, the newly emboldened investors can now seek recovery of the remaining 99 percent of the $5 billion they sunk into certificates of deposit administered by Stanford’s foreign bank, Stanford International Bank Ltd., Snyder said.
“These cases have been stymied for going on five years because of this SLUSA issue that was raised on a motion to dismiss,” Snyder said. “We will likely ask the court to allow us to go ahead and proceed with discovery now.”
In separate statements Wednesday, representatives for both Proskauer Rose and Chadbourne & Parke stressed a reading of the court’s decision as a “narrow procedural” issue, saying they still plan to fight for the case’s dismissal on other grounds.
Nevertheless, the firms’ SLUSA defense was a “seemingly strong procedural defense that is now wiped out,” according to Kotz.
The two firms are among a slew of secondary actors now facing class action claims brought by Stanford investors in Texas federal court. Suits against Willis Group, Greenberg Traurig LLP, Hunton & Williams LLP, Pershing, BDO Seidman, Toronto Dominion, Societe Generale SA, HSBC Holdings PLC, Trustmark Corp., Bank of Houston, and Adams and Reese LLP are all set to pick up again now that the high court has weighed in, according to Snyder.
While firms previously took comfort in the Supreme Court’s 2008 decision in Stoneridge Investment Partners v. Scientific-Atlanta, which held that “aiders and abettors” of fraud cannot be held secondarily liable in private federal suits, that may no longer be the case, according to John Massaro, partner at Arnold & Porter.
“That case provided a measure of comfort and protection to those gatekeepers and this signals that state courts and state causes of action are going to be available [to plaintiffs] going forward,” Massaro said.
But Wednesday’s decision is a reminder that secondary actors with deep pockets — like law firms and insurance brokers — should be aware of their liabilities and watch closely what clients they take on, attorneys say.
“The SEC has said [gatekeepers] have an obligation not just to clients, but to their profession,” said Stephen Ma, partner at Early Sullivan Wright Gizer & McRae LLP. “If there is an alleged fraud you have to do something about it, but what does ‘something about it’ mean? Those are not easy calls to make.”
While the long-term ramifications for Chadbourne and Proskauer remain to be seen, other firms need to grapple with these ethical questions before it’s too late, according to Larry Gabriel of Ezra Brutzkus Gubner LLP.
“You can’t just put statements out there without exploring the bona fides of a client’s business operation,” he said.
–Editing by Elizabeth Bowen and Chris Yates.
All Content © 2003-2014, Portfolio Media, Inc.