Judge Rules Against SEC in Stanford Claims Case

By Sarah N. Lynch - Reuters

(Reuters) - In a blow to the victims of Allen Stanford's $7 billion Ponzi scheme, a federal district judge ruled on Tuesday that U.S. securities regulators cannot force an industry-backed fund to start court proceedings so that victims can file claims. 

 The Securities and Exchange Commission had sought to force the Securities Investor Protection Corp to start liquidation proceedings for the victims.

SIPC argued that the 42-year-old Securities Investor Protection law does not apply in the Stanford case.

In his ruling, Judge Robert Wilkins for the U.S. District Court for the District of Columbia dismissed the SEC's request, saying the agency "failed to meet its burden" of showing why SIPC should be compelled to act.

Representatives for the SEC, SIPC and the Stanford Victims Coalition were not immediately available for comment.

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 offshore 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.

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.

SIPC, whose directors are confirmed by the U.S. Senate, covers claims for investors of failed brokerages. It has handled many high-profile liquidations in recent years, including proceedings for Bernard Madoff's Ponzi scheme and the collapse of Lehman Brothers and MF Global.

 In the case of Stanford, however, SIPC has argued that the law does not cover Stanford's victims, and that its power is limited to protecting customers against the loss of missing cash or securities in the custody of failing or insolvent member brokerages.

Stanford's offshore bank falls outside its scope, SIPC said.

The SEC sought to convince the judge that as SIPC's regulator, the agency had the authority to ask a court to take action if SIPC refuses to "commit its funds or otherwise to act for the protection of customers."

"The court is truly sympathetic to the plight" of the victims, Wilkins wrote. "But this court has a duty to apply the SIPA statute as written by Congress."