(Corrects “chairwomen” to “chairwoman” in last paragraph)
* SEC tried to force SIPC to begin liquidation proceedings
* Stanford victims have been unable to file claims
* SIPC said the law does not apply in Stanford case
* Judge sides with SIPC; says SEC has failed to meet its
burden
By Sarah N. Lynch
WASHINGTON, July 3 (Reuters) – A federal district judge on
Tuesday delivered a blow to the victims of Allen Stanford’s $7
billion Ponzi scheme, rejecting a request for an industry-backed
fund to start a court proceeding that could lead to victim
compensation.
The Securities and Exchange Commission had sought to force
the Securities Investor Protection Corp to start liquidation
proceedings for the victims, some of whom lost millions of
dollars to the fraud.
The judge found that the SEC did not meet its legal burden
of showing why SIPC should be compelled to act.
SIPC, which has handled high-profile liquidations such as
Bernard Madoff’s Ponzi scheme, contended that Stanford’s
offshore bank fell outside the scope of its authority.
The law, SIPC argued, limits it 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 Stanford Group Company
was a SIPC member, its offshore bank was not. And in any case,
SIPC said it was not chartered by Congress to combat fraud or
guarantee an investment’s value.
Allen Stanford was sentenced in June to 110 years in prison
for bilking investors with fraudulent certificates of deposit
issued by Stanford International Bank, his bank in Antigua.
Since 2009 when Stanford was first arrested and charged,
victims of the fraud have been fighting for SIPC to start a
liquidation proceeding in the hope of getting back at least some
of the funds they lost.
“The court is truly sympathetic to the plight” of the
victims, Judge Robert Wilkins for the U.S. District Court for
the District of Columbia wrote in dismissing the SEC’s case.
“But this court has a duty to apply the SIPA statute as written
by Congress.”
This marks the first time in the 42-year-history of the
Securities Investor Protection law that the SEC asked a court to
try and force SIPC to start a liquidation proceeding.
In a brokerage liquidation, a trustee winds down the
business, returns securities and other assets to customers and
creditors, and often tries to recover additional assets. The
goal is to maximize what customers and creditors recover, and
distribute assets fairly.
Stephen Harbeck, the president and CEO of SIPC, called the
judge’s order the “right ruling,” but noted that SIPC doesn’t
“take a lot of joy” out of it because of the plight of the
victims.
“We never crossed swords with the SEC to start a case in 40
years,” he said. “We did it with great seriousness.”
The SEC now has 60 days to decide whether or not to appeal
the judge’s ruling.
SEC spokesman John Nester said the agency is “reviewing the
decision.”
Angela Shaw, the director of the Stanford Victims Coalition,
said she was “floored” by the decision, and urged the SEC to
appeal and keep on fighting for the victims.
“I hope the SEC does go back to bat for investors,” she
said. “I am upset, but I am still hopeful.”
In his first-of-its-kind ruling, Judge Wilkins found that
the SEC relied on an “extraordinarily broad” interpretation of
the law on which to base its case.
He also criticized the agency, saying its argument for why
SIPC should act “cannot be squared with the SEC’s longstanding
interpretation” of the law over the years.
Republican Senator David Vitter, who has been a vocal
advocate for the victims, sought to apply some pressure on the
SEC on Tuesday to continue fighting the matter in court. “This
is horribly disappointing news, especially since it’s clear that
Allen Stanford was more than guilty in fraudulently losing the
victims investments,” he said.
“I will be encouraging the Securities and Exchange
Commission Chairwoman Mary Schapiro to explore every possible
appeal option. The Stanford Ponzi scheme victims should not take
the fall over SIPC’s concerns to cover their own losses.”
(Reporting By Sarah N. Lynch; editing by John Wallace and
Sofina Mirza-Reid)
