This case is one of first impression. The Supreme Court has never considered whether the federal government ought to take over complete control of all securities-related litigation. Given the recent turmoil on Wall Street, the ruling could have a profound impact on any economic bailout litigation in the coming years.
Washington, DC (PRWEB) October 2, 2008
Earlier this week, a petition for review was filed by Ackerman, Cowles & Associates with the United States Supreme Court asking for consideration of a case involving new legal ground in securities law. The firm's client, Robert Kowell, a defense-industry professional, is seeking to create uniform standards for the enforcement of securities laws from state to state. The petition for certiorari follows a published decision by the Ninth Circuit which allows court-appointed receivers to pursue "innocent" investors who may have made any gains on securities later shown to be tainted with fraud. It is contended that there is a lack of uniformity in the way securities investors are treated from one state to another. The decision below is published as Donell v. Kowell (9th Cir.2008) 533 F.3d 762. The Supreme Court has not previously considered whether innocent investors can be held liable for the fraud of securities issuers.
Lead counsel for the petitioner, Richard D. Ackerman, states, "This case is one of first impression. The Supreme Court has never considered whether the federal government ought to take over complete control of all securities-related litigation. Given the recent turmoil on Wall Street, the ruling could have a profound impact on any economic bailout litigation in the coming years."
The case arises out of an securities investment offering, known as the J.T. Wallenbrock & Associates program, which lured in approximately 6,000 investors from 1997 through early 2002. In the end, the securities turned out to be part of a Ponzi scheme and it was discovered that several hundred investors made gains initially. Those who made gains years before, even if "innocent," were sued for alleged fraudulent transfers.
As a result of a 2002 Securities & Exchange Commission action brought against the operators of investment program, the United States District Court appointed a receiver, one James Donell. The receiver was given the authority to "disgorge" any gains made by investors during the years Wallenbrock was in operation.
According to the Ninth Circuit's published opinion in this case, Donell began pursuing dozens of investors who, he claimed, made gains from their investment in the Wallenbrock securities in the late 90s and beyond. Many of the receiver's lawsuits weren't brought until 2004. In seeking recovery, Donell sought to assess damages for any and all gains made, regardless of whether the investor had incurred administrative expenses, holding costs, or acquisition costs for any securities.
By the time Donell began suing investors, many had already spent the money made on gains as part of their retirement budgeting, for home improvements, or on paying bills to creditors. Later findings by the U.S. District Court became a matter of public record and can affect credit scores, reputation, and security clearances for innocent investors or corporate employees holding securities issued by an employer.
The petition claims that enforcement of securities laws can vary from state to state as receivers can simply "borrow" prosecutorial laws depending on which state a particular investor might reside. For example, the statute of limitations for recovery on certain fraud theories might be four or six years in California, but only one or two in another state or in a federal forum. The investor is left with no idea as to which theories might apply to them once a receiver chooses to come after them for any past gains. Moreover, the Ninth Circuit held that the innocent investor is not to be given any offsets for acquisition, administrative, or holding costs on the investment.
In an effort to stabilize liability exposure for innocent investors, management personnel and significant stakeholders, the petition seeks to have the Supreme Court adopt a uniform limitations period for all "securities" coming under the authority of the Securities & Exchange Commission.
Ackerman says that, "Creating uniform and predictable standards for enforcement of securities laws will prove to be a very important process. Many innocent investors will likely become part of the fallout from the catastrophic failure of our financial systems. One can be assured that litigation-minded vultures will be on the hunt for the remains of those who might have innocently made money before the crisis happened. Given the likely desperation that many will feel, co-investors may start looking at each other to cover their losses. If some kind of consistency is not realized, one might find themselves liable for losses simply because one lives in the wrong state. A fundamental sense of fairness and respect for market stability requires more than this."
The Supreme Court will likely take several months to decide on whether review should be granted in the case.
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