Sometimes the federal securities laws are simply inadequate. This is especially true when the lawyers, auditors or bankers – the gatekeepers – turn a blind eye. Under the federal securities laws, aiders and abettors walk free. Thus, victims of Ponzi schemes have recently looked to state law for compensation and deterrence. Unlike your typical stock fraud case, a Ponzi scheme’s key feature is the lack of any real investment.

In a very important case to these and future Ponzi scheme victims, the Supreme Court has now agreed to decide whether two law firms, which once represented Allen Stanford, and other aiders and abettors, could avoid lawsuits by arguing that the claims were related to securities.

The defendants, in Roland v Green, argued that the federal Securities Litigation Uniform Standards Act (SLUSA) precluded state law aiding and abetting claims over alleged misrepresentations made “in connection with” the purchase or sale of covered securities. As is typical of other Ponzi schemes, Stanford’s fraud involved the sale of CDs which were purportedly invested in securities. Like the Madoff Ponzi scheme, these investments rarely occurred.

A district court judge agreed with the defendants and ruled that SLUSA preempted the state law cases. But last year the 5th U.S. Circuit Court of Appeals disagreed. The Appellate Court found that references to the portfolio being backed by ‘covered securities’ were tangentially related to the ‘heart,’ ‘crux,’ or ‘gravamen’ of the defendants’ fraud. Rather, the crux of the fraud were misrepresentations that the investments were “safe and secure,” “preferable to other investments,” “liquid,” and subject to “stringent reviews.”

We agree with the 5th Circuit Court of Appeals and urge the U.S. Supreme Court to affirm. Either way, the Supreme Court’s decision will have a significant impact on claims against lawyers, auditors and bankers who aid and abet Ponzi schemes.