A FINRA arbitration panel has ordered Bank of New York Mellon's Pershing to pay more than $5.6 million in damages to a bevy of victims of the Ponzi scheme run by R. Allen Stanford more than a decade ago, and more cases are on the way.
In a unanimous decision, the panel held Pershing responsible for losses suffered by the victims for its role in providing clearing services to the Houston brokerage that Stanford controlled.
Donald Ferguson, the lead attorney for the Stanford investors, says that he is preparing to bring another case against Pershing in the "next several weeks." The timing isn't precise, says Ferguson, because he is still gathering documentation from investors who will claim they were fleeced by Stanford.
"We're shooting for the next case in the $10 to $12 million range, and Pershing will be fighting it again," Ferguson says.
Pershing did not immediately respond to a request for comment. An attorney representing the clearing firm in the case and a spokeswoman for BNY Mellon both declined to comment.
Ferguson notes that the timing of the FINRA award almost precisely coincides with the 11th anniversary of regulators shutting down Stanford's Ponzi scheme and seizing control of his Houston-based brokerage.
"Here we are 11 years later and we're able to recover monies for these investors," Ferguson says. "It's very gratifying, I can tell you that."
The case stems from clients of Stanford's brokerage firm who were enticed to purchase certificates of deposit through the bank he controlled that was located in Antigua. The CDs turned out to be worthless, and many investors suffered catastrophic losses.
In 2012, Stanford was sentenced to 110 years in prison for his role in orchestrating the $7 billion Ponzi scheme.
Pershing served as a clearing firm for Stanford's brokerage from December 2005 through February 2009, when the scheme collapsed.
Pershing has argued that, as a third party, it should not be held liable for the actions of the brokerage firms it worked with, and has generally prevailed in litigation stemming from the Stanford affair.
Ferguson won damages for victims in one FINRA arbitration case in Mississippi last year. But even that result was a decidedly mixed bag, as some claimants received all of the damages they were seeking, while others received only a portion of the compensation they sought and still others received nothing at all.
Because arbitrators are not required to offer any explanation for how they determine how much claimants are entitled to receive in damages, the rationale for that case and the one resolved this month remains unclear.
Pershing has won in all the other FINRA arbitration cases, and successfully beat back a class action over its involvement with Stanford.
Still, in its annual report this week, BNY Mellon cited litigation relating to the Stanford affair as a risk factor. In that report, the firm says that Pershing had been targeted by more than a dozen lawsuits brought by Stanford investors, as well as a series of cases brought before FINRA arbitration panels.
Any precedent that emerges from those cases would concern the role of a clearing provider to conduct due diligence on the firms it works with. Those assumptions have been evolving in the aftermath of the Stanford and Madoff schemes, as well as the larger economic collapse of 2008-09, according to Bill Singer, a veteran securities attorney who runs the Broke and Broker blog.
"Frankly, the Great Recession has altered what was typically seen as a clearing firm's absolute immunity,” he says. “Ultimately, the issue for the courts is what Pershing knew, [what] it should have known and whether there was a duty imposed upon [it]."
It remains to be seen whether Pershing will ask a judge to vacate the arbitration award, though Ferguson notes that courts overwhelmingly uphold FINRA arbitration decisions.
Jim Eccleston, managing member of the Eccleston Law firm, says that investor claims against clearing service providers are rarely won, given the high burden of proof required to establish liability against a firm that did not have a direct relationship with the broker's clients.
"It is true that clearing firms must conduct due diligence on each introducing firm with which they do business," Eccleston says. "However, for investor lawyers attempting to show liability, it has been most difficult to prove that red flags existed, were discovered and should have caused a clearing firm to terminate the relationship and report suspected wrongdoing to the regulators."
But Ferguson made the case to FINRA arbitrators that those red flags existed, and that Pershing ignored them. Stanford, who solely controlled the brokerage and bank in question, was himself the subject of extensive media coverage prior to the regulatory crackdown that ended his operation.
"Their position was Allen Stanford wasn't our client, [and] the broker-dealer in Houston was. Well, I responded, ‘Allen Stanford owned that broker-dealer,’" Ferguson says. "You should have known that dealing with the bank, dealing with the broker-dealer in Houston, you were dealing with Allen Stanford, and he was no good."
Ferguson fully intends to bring that argument to the next case he will present to FINRA arbitrators, likely in the Dallas area, and to future cases involving Stanford investors down the road.
"FINRA arbitration awards really are not legal precedents to speak of, but they always find their way into subsequent hearings by the victor," Ferguson says. "This one will find its way into the next hearing."
