Judge to have say in SIPC's role in Stanford claims

By Nick Brown
Thu Feb 9, 2012 10:45pm EST

(Reuters) - A U.S. federal judge said he has the authority to decide whether the U.S. Securities & Exchange Commission can compel a brokerage industry protection fund to let thousands of victims of Allen Stanford's alleged Ponzi scheme file claims for compensation.

The SEC's effort to force the Securities Investor Protection Corp to initiate a claims procedure for Stanford's victims is subject to judicial review, Judge Robert Wilkins of federal court in Washington, D.C., ruled on Thursday.

SIPC, created under a 40-year-old investor protection law and funded by member firms, has handled liquidation proceedings for Bernard Madoff's Ponzi scheme and the MF Global failure. But it has said the law that governs it does not apply in the case of Stanford, the alleged mastermind of a $7.2 billion Ponzi scheme, because customer assets were kept in an offshore bank that is not a SIPC member.

The SEC in December filed a court application to force SIPC to act, saying the court was required to sign off on the application, but not authorized to review its merits.

Judge Wilkins rejected that position as "untenable," but sided with the SEC that the matter should be decided in a quick "summary proceeding" in lieu of full-blown litigation.

The judge told both the SEC and SIPC to brief him on the underlying issue of SIPC's obligations to Stanford's alleged victims.

Both sides took a glass-half-full view toward the ruling.

"We are...pleased that the court rejected the idea of full-blown litigation that could drag on for years and greatly delay relief to the Stanford investors," Matthew Martens, the SEC's chief litigation counsel, said in a statement.

Stephen Harbeck, SIPC's president and CEO, said he was pleased the SEC's application will receive judicial review.

"We are still reviewing the ruling, but SIPC looks forward to the opportunity to present its next submission in the case," Harbeck told Reuters.

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.

SIPC 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.

"The ruling seems largely procedural. The court has essentially struck down the SEC's attempt to say it gets to call all the shots," said Seton Hall University School of Law professor Stephen Lubben. "The next question is whether the court will defer to SIPC or force it to act."

The case is Securities & Exchange Commission v. Securities Investor Protection Corp, U.S. District Court, District of Columbia, No. 11-678.