Texas Securities: SEC’s Bid To Get Stanford Ponzi Scam Victims SIPC Coverage is Denied by District Court

The U.S. District Court for the District of Columbia has rejected the Securities and Exchange Commission’s lawsuit, which sought Securities Investor Protection Corporation protection for the investors that were defrauded in R. Allen Stanford’s $7 billion Ponzi scam. Federal Judge Robert Wilkins said that under the definition of the Securities Investor Protection Act, the SEC did not meet its burden in proving that more than 7,000 Stanford investors were “victims” and, as a result, eligible for SIPC coverage of up to $500,000 each. Wilkins therefore has decided not to order a liquidation proceeding in federal court in Texas.

SIPC, which has a special reserve fund to compensate investors that sustain financial losses in brokerage firms that fail, has been adamant that it cannot cover Stanford’s Ponzi victims because their losses were not in a failed brokerage firm. The investors had bought CDs issued by Stanford International Bank Ltd., which is a foreign-based bank, and not through Stanford Group Co., the broker-dealer based in Houston.

The SEC disagrees, which is why it brought this lawsuit to get the court to make SIPC start liquidation proceedings. The Commission doesn’t believe that an actual separation between the Antigua- located bank and Stanford Group existed and that clients who invested with Stanford International Bank effectively placed their money in the broker-dealer. It also said customer status shouldn’t only depend on the identity of the entity where the clients’ funds have been placed and pointed out that Stanford used his control over both banks to divert the CD sale proceeds toward Stanford Group obligations and expenses. The regulator noted how certain investors were given information that caused them to believe that they were buying SIPA-protected CDs.

In his ruling, however, Judge Wilkins, decided that the SEC’s interpretation of SIPA was “extraordinarily broad and would unreasonably contort” the language of the statute. The district court said that while it sympathized with Stanford’s victims, it had an obligation to apply SIPA the way Congress intended and to stick to the statute’s narrow definition of what constitutes a “customer.” Wilkins noted that an investor is eligible to SIPC compensation only if he/she has placed securities or money in a broker-dealer that becomes insolvent. If the investor did not entrust securities or cash, then he/she is not a “customer” and not entitled to recovery from SIPC. The court said that seeing as Stanford’s investors put money into Stanford International Bank accounts to buy their CDs and not Stanford Group, then within the meaning of SIP the defrauded investors that bought the CDs are not Stanford Group customers.

SEC Loses Bid To Force SIPC Payout For Stanford Investors, Bloomberg, July 3, 2012

SEC Loses Bid to Gain SIPC Coverage for Stanford Investors, Bloomberg/BNA, July 5, 2012
Securities Investor Protection Act, US Courts
Securities Investor Protection Corporation

More Blog Posts:
Texas Securities Roundup: Morgan Stanley Smith Barney Sued Over Financial Adviser’s Ponzi Scam, Judge Dismisses Ex-GE Executive Whistleblower’s Lawsuit Over His Firing, & Ex-Stanford Financial Group CIO Pleads Guilty to Obstructing the SEC’s Probe, Stockbroker Fraud Blog, July 3, 2012

Ponzi Scam Receiver Can Go Forward with Securities Claim Against Texas Investor Who Benefited From the Fraud, Stockbroker Fraud Blog, June 26, 2012

Madoff Trustee Files Clawback Lawsuits Collectively Seeking Over $1B For BLMIS Feeder Fund Transfers, Institutional Investor Securities Blog, June 12, 2012
Our Texas securities fraud lawyers represent investors bilked in Ponzi scams and other types of financial fraud. Contact Shepherd Smith Edwards and Kantas, LTD, LLP today.