A 5th Circuit panel held that investors can proceed with state class actions arising from the Allen Stanford fraud scheme. The appellate court held that the Securities Litigation Uniform Standards Act did not bar the state actions.
According to the 5th Circuit panel, the preclusion analysis under SLUSA is slightly more complex in cases where the fraudulent scheme alleged involves a multi-layered transaction. In these cases, the plaintiffs often are fraudulently induced into investing in some kind of uncovered security, like a CD or a share in a “feeder fund,” which has some relationship either through the financial
product’s management company or through the financial product itself to transactions (real or purported) in covered securities, such as stocks.
The court stated that the proper standard for "in connection with" analysis in Uniform Standards Act cases was whether “there is a relationship in which the fraud and the stock sale coincide or are more than tangentially related." The court determined that the purchase or sale of securities was only “tangentially related” to the Stanford fraud. The fact that the instruments in question may have been marketed as backed by Uniform Standards Act covered securities did not meet the "more than tangentially related" standard. Similarly, the fact that some investors may have liquidated covered securities in their retirement accounts to fund their Stanford investments was not determinative, because these sales were not a necessary part of the fraud.
Roland v. Green, Dkt. No. 11-10932.