CHICAGO (Bloomberg) - R Allen Stanford's investors cannot be pursued by a court-appointed receiver over the principal they recovered before the businessman was accused of running a $7 billion fraud scheme, an appeals court ruled.

The US Court of Appeals in New Orleans, in a decision on Friday, upheld a July lower-court ruling that blocks receiver Ralph Janvey from recovering principal returned to some investors from certificates of deposit at Stanford's Antigua-based bank. The investors may still be sued individually for interest they received that exceeded their deposits, said a lawyer for the US Securities and Exchange Commission (SEC).

The investor defendants have legitimate ownership interests in their CD proceeds, and therefore cannot be considered proper relief defendants, the three-judge panel said in its ruling. Consequently, the district court lacked authority to freeze the investor defendants assets.

The freeze was imposed after the SEC sued in February. It was continued by the lower court while the appeal over the so-called clawback lawsuits was pending.

This is fantastic for the investors, Michael Stanley, a Houston lawyer who represents more than 100 Stanford investors and former employees, said in a phone interview. The appeals court shut the door completely on attempts to recover funds from investors who lost more than they made on the Antiguan CDs, he said.

Janvey had sought about $894 million from investors, with plans to use the proceeds to repay all of Stanford's investors a pro rata share he said would be as much as 20 cents on the dollar.

Stanford, 59, is the principal of the Stanford Financial Group Co., a Houston-based business empire that included Stanford International Bank Ltd. in Antigua and investment adviser Stanford Capital Management LLC.

The SEC sued Stanford and two associates, accusing them of orchestrating a massive fraud by deceiving investors about the nature and oversight of CDs issued by the bank.

More than 30,000 investor accounts were frozen by the court while the receiver reviewed their histories for evidence of fraud.

A federal grand jury in Houston returned a 21-count criminal indictment against Stanford in June. The financier has denied all allegations of wrongdoing.

Janvey was appointed by the Dallas federal court hearing the SEC's action to marshal Stanford's assets to repay investors.

US District Judge David Godbey in Dallas on July 31 ruled the receiver had no claim against the investors for disgorgement of returned investment principal and that an injunction blocking them from access to their accounts should be dissolved.

Janvey, a lawyer in Dallas, appealed to the New Orleans panel, arguing that investors who pulled their money out of the Stanford organisation before its collapse would enjoy preferential treatment at the expense of the thousands of other investors who were not so lucky.

The SEC opposed the appeal, as did a court-appointed investor representative, John Little, and several investors including professional baseball players Johnny Damon, Greg Maddux and Andruw Jones, who had redeemed their initial investments before the SEC sued, according to a court filing.

Pursuing claims against a small subset of admittedly innocent investors for the return of the funds they invested would come at great cost to these victims and the receivership estate, and with questionable benefit to all of the victims of the Stanford scheme, the SEC said in its appeals court brief.

Kristie Blumenschein, a partner at Janvey's law firm, did not immediately respond to e-mails seeking comment.

Little said in an e-mail that he believes clawback claims against investors are done.

The account freeze should now be gone so that these innocent investors will have access to funds that have been frozen for nine months, Little said.

If Janvey or the SEC wants to sue for the interest, now theyve got to sue each individual investor and each investor will have his day in court, Michael Quilling, Dallas lawyer representing dozens of Stanford investors including Damon, Maddux and Jones, said in a phone interview.

For most investors, the interest they received on the CDs was such a small amount, that most investors probably would not even contest it if they were sued for interest only, Quilling said.