Almost 11 years to the day that regulators seized Houston-based broker Stanford Financial Group, an arbitration panel has ordered its clearing firm to pay $5.6 million to 23 investors caught in the firm’s multi-billion-dollar Ponzi scheme.
Tuesday’s award was only the second granted in arbitration to Stanford investors who have brought complaints against Pershing, the Bank of New York Mellon-owned clearing firm that worked with the firm from 2006 through its February 2009 shutdown. The investors bought certificates of deposit from a Stanford-controlled bank that proved worthless.
Investors in three earlier arbitrations got no awards, and only six of 18 claimants were awarded a total of $1.4 million in another case last May. A class-action lawsuit filed in November 2009 against Pershing was denied by a federal court in 2018.
Pershing, which has argued that it had no legal responsibility for investigating the quality and suitability of investments sold by its brokerage firm customers, was ordered in Tuesday’s decision to pay the almost two-dozen investors about $2.3 million in compensatory damages and the same amount in punitive damages. The investors had sought a total of about $17.4 million, according to the award document from three public arbitrators in Dallas.
The arbitrators, whose chair, James W. Kerr, was a former administrative law judge, did not explain their decision. Lawyers said that punitive damages in arbitration cases are rare, particularly in Texas venues.
“It is a sweet victory,” said Donald L. Ferguson, who was one of three lawyers representing Stanford investors against Pershing in the five cases. “You don’t know what the arbitrators were thinking, but it’s quite a hurdle” to meet the Texas threshold of having to prove “outrageous conduct” to qualify for a punitive award.
Pershing does not comment on legal issues as a matter of policy, a spokesman said.
Another person familiar with the firm’s arguments said that because claimants were awarded only about 16% of the compensatory damages sought the “victory” was bittersweet for them and their lawyers.
Neither the Pershing spokesman nor the clearing firm’s lawyers at McGuireWoods would comment as to whether they will ask a court to vacate the arbitration decision.
Several lawsuits against Pershing remain outstanding. Ferguson said he and fellow plaintiffs’ lawyers Scott Hirsch and Charles Scarlett expect to file additional arbitration cases, as does at least one other lawyer in Houston.
Under Finra rules, arbitration claims must be made within six years of an event precipitating a claim, unless a related case is pending in court. Ferguson and his colleagues have argued that the eligibility countdown in the Stanford cases did not begin until a Dallas court dismissed the class-action case against Pershing in 2018.
“We still have about four years to go,” he said.
The plaintiffs’ lawyers did not ask for attorneys’ fees because that would have put their clients at risk of having to pay Pershing’s fees if they lost, according to Ferguson.
“Many of these people put 100% of their pension plans and life savings into these CDs,” he said. “The last thing I wanted was to put them at risk for dishing out more in attorneys’ fees.”
R. Allen Stanford, the 69-year-old founder of the collapsed company, is serving a 110-year federal prison sentence. He forfeited $5.9 billion under his sentence, and in 2013 lost a battle to disgorge $6.7 billion to the Securities and Exchange Commission. Stanford has unsuccessfully filed several appeals of his conviction.
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