JURIST - Paper Chase: Federal judge allows suit against SEC over Stanford Ponzi scheme

[JURIST] A judge for the US District Court for the District of Southern of Florida [official website] ruled [order, PDF] Friday that a suit against the Securities Exchange Commission (SEC) [official website] over the agency's failure to report Allen Stanford [JURIST news archive] and his Ponzi scheme may proceed. The suit alleges that the SEC had identified that Stanford was running a Ponzi scheme four times [Bloomberg report] prior to his indictment in 2009 and that the SEC had a "nondiscretionary duty" to report Stanford to the Securities Investor Protection Corporation (SIPC) [official website]. The SIPC compensates victims of securities fraud. SEC investigators had concluded that Stanford was probably running a Ponzi scheme as early as 1997. The SEC argued that under the 1934 Securities Exchange Act [text, PDF] it had the discretion to decide what action to take against Stanford and thus had sovereign immunity from claims brought under the Federal Tort Claims Act [DOJ backgrounder]. The suit alleges that SEC investigators declined to pursue action against Stanford due to the complexity of his Ponzi scheme and instead chose to pursue easier cases, ignoring several warnings. This is the first judge to rule that the SEC's sovereign immunity does not apply in cases such as this.

Stanford was sentenced in June to 110 years in prison [JURIST report] for his $7 billion Ponzi scheme. The US Court of Appeals for the Fifth Circuit [official website] ruled in March that the victims of Stanford's $7 billion Ponzi scheme would be allowed to pursue a class action [JURIST report]. The trial against Stanford began in January after a judge ruled that he was competent to stand trial, overruling a previous holding to the contrary [JURIST reports]. In February 2011 Stanford accused [JURIST report] several federal agents of having deprived his constitutional rights by using abusive law-enforcement methods. Stanford was first indicted [JURIST report] in 2009.