Securities Fraud Investigations in a Tightened Space: Likely effects of a Possible Stanford Ruling

January 2013

IN THIS ISSUE

— A Stanford Effect? The Issues Raised in Review of Shareholder Suits
— Stanford Ruling Could Change Securities Fraud Landscape

GREETINGS!

Welcome to the January edition of our newsletter! In this issue, we’ll examine the issues involved in the R. Allen Stanford fraud case, which the U.S, Supreme Court has agreed to hear, and how their potential ruling could affect fraud investigations and shareholder suits.

A STANFORD EFFECT? THE ISSUES RAISED IN REVIEW OF SHAREHOLDER SUITS

Billionaire financier R. Allen Stanford, convicted in July 2012 of running a Ponzi scheme and sentenced to 110 years in prison, may yet have an impact on the court system that has sent him to prison for likely the rest of his life. As numerous defrauded investors flooded the courts with civil class action securities fraud suits, a U.S. Court of Appeals ruled that investors could sue law firms and insurers, after the investors argued that the firms were aware of in advance. Now, the U.S. Supreme Court will hear the law firms’ appeal of that ruling.

The most recent relevant preceding law was passed in 1998. Known as the U.S. Securities Litigation Uniform Standards Act, the law created different standards for the bringing of class action securities fraud suits, allowing suits alleging misrepresentations of “covered securities” to be removed to federal courts, not state courts. This ruling could potentially create further restrictions — or, at a minimum, insert clarity where some ambiguity currently exists — regarding the proper venue for securities class actions predicated on fraud.

STANFORD RULING COULD CHANGE SECURITIES FRAUD LANDSCAPE

Currently, there are very few exemptions to the 1998 Act, including one that allows securities class actions alleging fraud that are based on the state securities laws of where the defendant company is incorporated — but this is of less help against independent operators who are typically prominent in “pump and dump” schemes, and also of less help against corporations domiciled in states where securities laws are more favorable to the defendant than federal securities laws.

The court’s ruling could potentially create more exemptions from the 1998 Act, which would broaden the amount of shareholders able to bring actions regarding “covered securities”, but its equally as likely to create restrictions limiting what parties can be sued under securities fraud statutes. Given this latter possibility, counsel and their investigative teams need to tailor their work to respond to this changing environment. many of the usual steps – maintaining a chain of custody for documents, interviews, etc. — will still apply, but a sharpened focus will be required if fewer players are able to be the focus of an inquiry.