SEC says Stanford victims should be paid

Source: FT.com
Published: June 16 2011 01:04 | Last updated: June 16 2011 01:04

Victims of the alleged $7bn Stanford Ponzi scheme should receive compensation from a federal fund, the Securities and Exchange Commission has recommended.

Wednesday’s decision came a day after David Vitter, a Republican senator from Louisiana, threatened to block the confirmation of SEC commissioners until it decided whether his constituents should be compensated.


EDITOR’S CHOICE

In depth: Stanford scandal - Jun-19SEC probes Merrill CDO sale - Jun-15Goldman banker loses court bid - Jun-11Regulator rebuffs plea on SAC Capital probes - Jun-11Investors target BDO with lawsuit - May-27Thousands of investors lost money in the 2009 collapse of Stanford Financial Group. Texan billionaire Allen Stanford is awaiting trial on charges of perpetrating a Ponzi scheme, which he denies. The Securities Investor Protection Corporation, which administers a guarantee fund for collapsed brokers, must now consider the SEC recommendation. It had previously decided the case did not merit compensation.

Compensation from the SIPC, which would be limited to only some of the US investors, would be limited to $500,000 per customer and $250,000 in cash, and the calculation would be based on the money invested rather than any later notional value.

“There will likely be litigation, and no one will be getting a cheque in the mail tomorrow, but still a huge step and a sigh of relief for many,” said Mr Vitter. The SEC’s analysis quoted an argument by counsel in the Madoff Ponzi fraud, which was taken up by the SIPC, as relevant: “This is a Ponzi scheme. It’s a zero-sum game. The customer fund is the money that went in. We can’t talk about anything else. Can’t talk about profits. Can’t talk about stocks.”

Mr Vitter said that he would lift his objection to the confirmation of Daniel Gallagher and incumbent commissioner Luis Aguilar as a result of the recommendation.

The SIPC said that the SEC’s report was “the first time the SEC has informed SIPC of the possibility that the Stanford matter is appropriate for a proceeding under the Securities Investor Protection Act”.

“SIPC’s board will review the referral, and analyse the SEC’s underlying documentation as quickly as possible,” said Stephen Harbeck, head of the SIPC.

The SEC declined to comment on whether political pressure had contributed to the decision. One person familiar with the situation said the length of the commission’s analysis suggested it had not been prepared overnight.

In the analysis, the SEC rejected the previous argument from SIPC that customers were not covered because of the way their certificates of deposit were held. “[That] would elevate form over substance by honouring a corporate structure designed by Stanford in order to perpetrate an egregious fraud,” the SEC said.