11th Cir.: Stanford Investors Can't Sue U.S. Over SEC Failure to Halt Ponzi

By Phyllis Diamond

March 30 — Investors who lost money in R. Allen Stanford's massive Ponzi scheme can't sue the government over the Securities and Exchange Commission's alleged negligence in failing to halt the ongoing scam, the U.S. Court of Appeals for the Eleventh Circuit affirmed March 30 (Zelaya v. United States, 2015 BL 87522, 11th Cir., No. 13-14780, 3/30/15).

The Federal Tort Claims Act shields the U.S. from liability, Judge Julie Carnes concluded.

She added that in reviewing the district court's dismissal of the case, the appeals court didn't reach any conclusions regarding the SEC's conduct “or whether the latter's actions deserve Plaintiffs' condemnation.”

Staff Investigations

The court recounted that according to the plaintiffs, the SEC first investigated Stanford beginning in 1997. However, it failed to take action, notwithstanding some staff members' observations that Stanford's purported returns were “ ‘absolutely ludicrous,' ” and that his operation “ ‘looks like a Ponzi scheme to me.' ”

After investigating Stanford several more times, the court continued, the SEC “finally” took action against Stanford and his various business entities in 2009. “By then, though, most of the investors' money was gone and the SEC has been able to recover only $100 million of the $7 billion invested” in Stanford's Antigua-based bank.

Plaintiffs Carlos Zelaya and George Glantz were two of many defrauded investors, the court said. They invested $1 million and approximately $650,000, respectively, losing “almost their entire investments.”

In 2011, the court continued, the plaintiffs sued the government in federal district court; they alleged that the SEC failed to bring its concerns to the Securities Investor Protection Corporation or to revoke the registration of Stanford's broker-dealer/investment advisory concern.

The district court dismissed the allegations for lack of subject matter jurisdiction and the plaintiffs appealed to the Eleventh Circuit.

Exceptions to Waiver

Affirming, the appeals court agreed that the FTCA's discretionary function and misrepresentation exceptions “apply here to negate the waiver of sovereign immunity that might otherwise arise from” the statute.

It explained that as a general matter, the FTCA waives what otherwise would be the government's sovereign immunity from lawsuits over its employees' tortious misconduct. However, the appeals court said, “there are exceptions to that general waiver”—including, as relevant here, claims based on “the performance or nonperformance of a discretionary task”; and claims “ ‘arising from' ” misrepresentations, among other wrongs.

It concluded that both exceptions apply to bar the plaintiffs from suing the government over the SEC's alleged misconduct.

To contact the reporter on this story: Phyllis Diamond in Washington at pdiamond@bna.com

To contact the editor responsible for this story: Susan Jenkins at sjenkins@bna.com