SIPC Says It Need Not Reimburse Stanford Victims; SEC Disagrees

By John Sullivan, AdvisorOne

Dispute centers on meaning of 'theft' versus 'fraud.' SIPC to decide on next move by mid-September.

Call it splitting hairs, but at least one entity designed to protect investors from theft is sticking by its ruling against reimbursing the victims of money manager Allen Stanford. The key word is "theft," and Bloomberg reports the Securities Investor Protection Corp. (SIPC) alleges Stanford committed fraud, not theft, and therefore SIPC has no liability for damages.

Stanford, chairman of the now defunct Stanford Financial Group, based in Houston, was charged on Feb. 17, 2009 by the SEC with fraud and other violations of U.S. securities laws for an alleged $8 billion Pozi scheme that involved supposedly "safe" certificates of deposit.

SIPC maintains the circumstances specific to the Stanford case mean "that the law doesn’t provide for payouts to investors." The SEC’s staff initially agreed, but on June 15, the SEC informed SIPC that the “Stanford matter was appropriate for a proceeding under the Securities Investor Protection Act,” or SIPA.

The Bloomberg report says "the SEC told SIPC to start a process that could give as much as $500,000 to each qualified Stanford investor. The agency further surprised SIPC by threatening to sue if it didn’t carry out the plan."

SIPC said that said it expects its board to announce “on or about September 15, 2011 its decision about the referral from the SEC, and SIPC President and CEO Stephen Harbeck said that SIPC has “already started conferring with the SEC and the Stanford receiver regarding the SEC's referral in the Stanford matter.”

The SEC’s action “'is highly unusual,' SIPC’s Harbeck told the news service.

Bloomberg adds "Harbeck has said publicly that he doesn’t think the Stanford investors are eligible for repayments. SIPC is supposed to aid investors when their securities are stolen or go missing at a brokerage. Stanford’s customers still have possession of their securities, he said, and fraud by itself isn’t covered."

For people who lost money through the Stanford scheme, “it is very difficult to explain the difference between theft and fraud,” Harbeck said, according to Bloomberg.