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Wednesday, January 23, 2013

SEC, SIPC to argue in court over Stanford claims

Securities regulators are due in court on Tuesday to argue that a brokerage industry-backed protection fund should let thousands of victims of Allen Stanford's alleged Ponzi scheme file claims for compensation.
The Securities Investor Protection Corp, which has handled liquidation proceedings for Bernard Madoff's Ponzi scheme and the MF Global failure, has said the 40-year-old Securities Investor Protection law does not apply in the Stanford case.
The unprecedented legal face-off between SIPC and the U.S. Securities and Exchange Commission could have far-reaching consequences for how investors are compensated if their brokerage firm fails.
Stanford, 61, was arrested in 2009 over charges that he ran a $7.2 billion Ponzi scheme linked to certificates of deposit issued by his Antigua-based bank.
Tuesday's hearing in the U.S. District Court for the District of Columbia will come just a day after Stanford's criminal trial gets under way in another federal court in Texas.
The SEC asked the District of Columbia court in December to uphold its authority to order SIPC to help Stanford's victims after negotiations between the two entities had failed. It is unclear how soon Judge Robert Wilkins could rule.
SIPC is standing by its decision not to intervene on behalf of Stanford investors and has created a website to explain its position at
It argues that it is limited by law to protecting customers against the loss of missing cash or securities in the custody of failing or insolvent SIPC-member brokerage firms.
While Stanford's Texas-based brokerage was a SIPC member, its offshore bank was not. And in any case, SIPC says it was not chartered by Congress to combat fraud or guarantee an investment's value.
"I think as a general policy matter, SIPC probably should win," said Seton Hall University School of Law professor Stephen Lubben. "If they don't, we are turning this insurance fund... into basically fraud protection across the board in all kinds of investments, which is going to be a lot more expensive."
Initially, some staff at the SEC seemed to agree with SIPC's view.
Former SEC General Counsel David Becker is quoted in a report released in September as saying "the law is the law" and that Stanford victims did not qualify.
Then in June, just one day after Senator David Vitter threatened to block the nominations of two SEC commissioners until the agency made a decision on Stanford claims, it announced that it was siding with the victims.
In a 195-page document, the SEC said that for SIPC to conclude that these customers did not actually deposit cash with Stanford Group "would elevate form over substance by honoring a corporate structure designed by Stanford in order to perpetrate an egregious fraud."
The timing of the SEC's announcement has raised some eyebrows at SIPC.
But Angela Shaw, the founder and director of the Stanford Victims Coalition, said the SEC's decision was not based on politics. It came, she said, after she turned over thousands of documents that helped convince the agency that investor money never went to the bank, but was instead spent by the brokerage.
"We have a broker-dealer that was a SIPC member that stole customers' funds," she said. "SIPC covers theft of investor funds when they are stolen by the broker-dealer, and the SEC has not alleged that this foreign bank stole our money."
It is not clear whether Tuesday's hearing will explore the merits of the arguments for or against SIPC coverage for Stanford investors.
The SEC, which has oversight authority over SIPC, plans to tell the judge that its position is "not subject to judicial review." It wants the court to simply weigh whether it has met the requirements to compel SIPC to launch a liquidation proceeding.
Stephen Harbeck, president and CEO of SIPC, rejects that argument entirely.
"I think it is fair to say that the SEC's position is as follows: The court may not look at the facts, the court may not look at the law, SIPC may not present any counter-argument, there is no appeal, and the court must do as we say," he said. "I am unaware of any jurisprudence that allows that."

SEC spokesman John Nester said Harbeck "apparently misunderstands our position, which is based on the facts and the law."

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