A Federal Judge has denied Pershing LLC’s request to dismiss all claims against it for serving as the clearing firm in Allen Stanford’s multi-billion dollar Ponzi scheme. According to the Complaint, Pershing allegedly aided the scheme perpetrated through Stanford Group Co. U.S. and the Judge held that “Pershing’s role as a clearing broker is no impediment to imposing liability. … Plaintiffs make a number of allegations that, when viewed in a light most favorable to plaintiffs, support a reasonable inference that Pershing knew of the underlying fiduciary breaches.” The court found that the plaintiffs sufficiently pled substantial assistance to Stanford and participation in breach of fiduciary duty.
The Plaintiffs allege as clearing broker for the Stanford businesses between December 2005 and December 2008, Pershing was integral to the fraud, completing the sale of at least $500 million of the bogus investments while holding all of the cash and securities of Stanford customer. According to the Complaint, Pershing ignored obvious red flags in the way Stanford conducted business, including the offshore transfers of funds and high salaries Stanford paid brokers, in favor of continuing the lucrative relationship. Despite internal concerns about the validity of Stanford’s business and abundant red flags, Pershing held off from filing a suspicious activity report with regulators and continued to participate in the purchase and sale of the dubious investments, the complaint claims.
This is an important court decision for any customer considering pursuing claims against a clearing broker. In many instances, clearing brokers provide all back office support for small or poorly capitalized broker-dealers. Although clearing firms frequently try to get claims against them dismissed claiming they only performed ministerial tasks, the reality is the clearing firms offer substantial assistance to the introducing firms including the extension of margin or other financing arrangements. As the Pershing case highlights, clearing firms are also in a position to see red flags of misconduct or aid and abet the misconduct of the introducing firm.
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