Early case in new term tests Supreme Court’s pro-business stance

WASHINGTON —The Supreme Court opened its new term Monday by hearing arguments on who can be sued for a massive Ponzi scheme and by saying “no” to more than 1,900 litigants who had hoped the justices would hear their appeals.

The court ignored the partial government shutdown and said it would continue with “normal operations,” at least this week. Because the Constitution forbids reducing pay for federal judges while they hold office, the justices will continue to receive their salaries.

The first significant case to be heard tests the court’s pro-business reputation, and by that standard, it could hold a surprise.

In the past, the court has often blocked suits known as class actions against corporations and banks, in which large numbers of people jointly sue the same defendants. But on Monday, the justices sounded skeptical of the claim that they should shield investment companies, insurers and law firms from being sued by people who say they lost money in a massive Ponzi scheme run by R. Allen Stanford.

Stanford has gone to prison for life for a $7-billion fraud in which investors were lured into buying supposedly safe, high-yield certificates of deposit from his bank in Antigua. They were promised that the bank’s CDs were backed by a liquid portfolio of stocks. Instead, Stanford used the money to fund his lavish lifestyle.

Federal law does not always provide much help for cheated investors who bought or sold stock. They can sue the direct perpetrators of a fraud — in this instance, Stanford — but he is bankrupt. Investors generally cannot sue the banks, insurers or lawyers who may have aided a stock fraud.

The Supreme Court adopted this rule against class-action suits based on “aiding and abetting” fraud in 1994, and Congress has since gone further to block such suits in state courts involving stock frauds. In 1998, Congress said no group of cheated investors may sue over a false promise “in connection with the purchase or sale of a covered security.” The theory behind that rule is that separate federal securities laws exist to protect investors.

The case heard Monday turned on the meaning of that phrase. Thousands of investors who lost the savings they invested with Stanford brought suits in state courts in Texas and Louisiana against an investment company, insurance companies and lawyers who did work for Stanford.

They alleged that the companies aided his fraud. They said they were suing over the phony CDs, not the nonexistent portfolio of stocks. Agreeing with that claim, the U.S. 5th Circuit Court of Appeals allowed the suit to go forward.

The high court agreed to review that decision. Washington attorney Paul D. Clement, a former U.S. solicitor general, urged the justices to throw out the suit because it rested on a “false promise” involving nonexistent stocks.

But he ran into skepticism from the conservative, generally pro-business justices who might be seen as most likely to support his argument.

Justice Samuel A. Alito Jr. noted there were not “any purchases or sales of covered securities.”

Justice Antonin Scalia made the same point even more strongly. “I had assumed that the purpose of the securities laws was to protect the purchasers and sellers of the covered securities. There is no purchaser of a covered security involved here,” he said.

Chief Justice John G. Roberts Jr. pointed to the bank as the source of the fraud. “The only element of fraud in there was by the bank itself,” he said.

Tom Goldstein, a Washington attorney representing the cheated investors, picked up the theme. “This is a bank,” he said. The investors bought CDs from “a bank that doesn’t sell covered securities.” And if so, he argued, the court should not invoke the federal securities law to block lawsuits against those alleged to have helped Stanford market his phony CDs.

It will be several months before the court decides the case, Chadbourne & Parke vs. Troice.

The court began the day by handing down a 94-page list of appeals that were dismissed without a hearing. One of them was from Kevin Ring, who was convicted of bribing public officials related to the Jack Abramoff scandal and sentenced to 20 months in prison.

Another rejected appeal was from Franklin Jeffries, an Iraq war veteran from Tennessee who went to prison for posting on YouTube a video in which he strums a guitar and sings a song threatening to kill a judge.

The appeals court that upheld his conviction described it as the first successful prosecution for a criminal threat that arose from a song or video.

Jeffries was involved in a custody dispute with his ex-wife over their daughter. “Take my child, and I’ll take your life. I’m not kidding judge,” he said in his YouTube song. “I guarantee you, and if you don’t stop, I’ll kill you.”

Federal law makes it a crime to send a threatening communication, and a jury agreed that his words amounted to a “true threat” against the judge. Jeffries was sentenced to 18 months in prison.

His appeal in Jeffries vs. United States argued that he did not intend to carry out his threat, and that the prosecutors should have had to prove he had criminal intent.

david.savage@latimes.com