WASHINGTON On the first day of its new term on Monday, the U.S. Supreme Court appeared divided over whether lawyers, insurance brokers and others who worked with convicted swindler Allen Stanford could avoid lawsuits by investors seeking to recoup losses incurred in his $7 billion Ponzi scheme.
New York-based law firms Chadbourne & Parke and Proskauer Rose and insurance brokerage Willis Group Holdings Plc were all sued by former Stanford investors.
They are part of a consolidated case along with two other defendants, financial services firm SEI Investments and insurance company Bowen, Miclette & Brittin, for which the Supreme Court heard a one-hour argument on Monday.
The defendants sought Supreme Court review after the New Orleans-based 5th U.S. Circuit Court of Appeals in March 2012 said the lawsuits brought under state laws by the former Stanford clients could go ahead.
The former Stanford clients are keen to pursue state law claims because the Supreme Court has previously held that similar so-called "aiding and abetting" claims cannot be made under federal law.
The defendants have argued that under the Securities Litigation Uniform Standards Act (SLUSA), the claims cannot be heard under state law either.
The class action lawsuits filed by the former investors accused Thomas Sjoblom, a lawyer who worked at both law firms, of obstructing a Securities and Exchange Commission probe into Stanford, and sought to hold the other defendants responsible as well.
Stanford's fraud involved the sale of certificates of deposit by his Antigua-based Stanford International Bank. Much of the litigation centers on whether these qualified as securities under applicable laws.
Stanford is serving a 110-year prison sentence.
During Monday's oral argument, the justices questioned to what extent a ruling in favor of the plaintiffs would affect the SEC. The Obama administration, representing the SEC, sided with the defendants.
The administration said in court papers it was against the lawsuits because they would conflict with Congress's intent to give the SEC the "ability to protect the securities markets against a variety of different forms of fraud."
Justice Department lawyer Elaine Goldenberg told the justices that lawsuits like those filed by the Stanford investors have "a very particular effect on investor confidence and the integrity of the markets, which is one of the purposes of the securities laws."
Several justices, including Justice Elena Kagan and Justice Stephen Breyer, indicated they would be uncomfortable with allowing such lawsuits to proceed in state court, although they also seemed keen for some kind of limit to federal authority.
Justice Anthony Kennedy, often the swing vote in close cases, questioned whether the claims made by the Stanford investors were any different from similar cases that courts already have determined to be excluded from state law claims.
But Justice Anthony Scalia signaled support for the plaintiffs on the language of the federal law in question, which says that state lawsuits are barred in relation to activity "in connection with the purchase or sale" of a covered security.
"There has been no purchase or sale here," he said.
A ruling in the case is expected before the term ends in late June.
The cases are Chadbourne & Parke LLP v. Troice et al, U.S. Supreme Court. No. 12-79; Willis of Colorado Inc et al v. Troice et al, U.S. Supreme Court, No. 12-86; and Proskauer Rose LLP v. Troice et al, U.S. Supreme Court, No. 12-88.
(Reporting by Lawrence Hurley; Editing by Howard Goller and Cynthia Osterman)