Stanford investors insurance coverage source of internal SEC dispute

Loren Steffy
Chron.com

The Securities and Exchange Commission’s change of heart with regard to the long-suffering investors of Allen Stanford is now a little more clear.

Earlier this week, the SEC’s inspector general released his latest report, this one focusing on potential conflicts of interest involving David Becker, the commission’s former general counsel and senior policy director. Becker was involved in the SEC’s case to liquidate Bernard Madoff’s investment firm under the Securities Investor Protection Act, a 1970s law that created an industry-funded insurance program for investors who lost money through broker fraud. Becker, it was later reported, had inherited some “fictitious profits” from a Madoff account that had belonged to his mother and that was liquidated after her death.

The rules for coverage under SIPA, which is administered through the Securities Investor Protection Corp., are very specific. Becker supported the idea that Madoff investors were covered, but he opposed the idea in the Stanford case, according to the report.

Becker himself took a different approach when he analyzed SIPA coverage issue for investors in the multi-billion Ponzi scheme ofR. Allen Stanford from the approach described above in the Madoff Liquidation. After the SEC brought a civil enforcement action against Stanford and three ofhis companies, the President and CEO of SIPC sent a letter to the receiver appointed for the Stanford matter indicating that, based on the facts as set forth by the receiver, there was no basis for SIPC to initiate a proceeding under SIPA with respect to Stanford investors. Becker testified that he became involved initially in the SEC’s considerations about SIPC coverage with respect to Stanford investors, and his opinion as to the matter “was that SIPA, the statute, did not cover the Stanford situation,” noting that although “it didn’t make sense that it would not cover something like Stanford, but cover Madoff, … the law is the law.” By contrast, in the Madoff Liquidation, Becker considered a variety of approaches for determining net equity in order to, as Becker testified, “take the position which got the most money [to] injured investors consistent with the law.”

Becker’s opposition to SIPC coverage for Stanford investors may be the reason that the SEC appeared to support SIPC’s position that clients of Stanford’s brokerage weren’t covered, even though Stanford’s brokerage, a SIPC member, peddled the bogus certificates of deposit at the heart of the alleged Ponzi scheme.

After Becker left, the SEC changed its mind on the idea of SIPC coverage, saying many of Stanford’s U.S. investors should be covered under the law. SIPC’s board is still considering the SEC’s decisions, and its expected to announce its own decision this month.

Here’s the full inspector general’s report.

Oig-560 Madoff v Stanford Sipc