Stanford Victims Aren't Owed SIPC Aid, Ex-SEC Chiefs Say

Two former commissioners of the U.S. Securities and Exchange Commission urged the D.C. Circuit on Monday to affirm a landmark ruling declaring that Securities Investor Protection Corp. doesn't owe compensation to victims of Robert Allen Stanford's $7 billion Ponzi scheme.

Ex-SEC Commissioners Joseph A. Grundfest and Paul S. Atkins said the D.C. Circuit will “dramatically expand the scope of persons covered through SIPC” if it chooses to reverse a lower court's ruling and compel SIPC to pay the fraud victims' claims through a liquidation proceeding.

Grundfest and Atkins said the July decision by U.S. District Judge Robert L. Wilkins should stand because SIPC lacks the authority to provide relief to investors of Stanford's foreign bank Stanford International Bank Ltd.

Grundfest and Atkins said the SEC's argument that an offshore bank should be covered under the Securities Investor Protection Act “contravenes the plain language of the statute, conflicts with the relevant statutory history, and is at odds with more than 40 years of judicial precedent.”

The brief comes nine months after Judge Wilkins ruled that Antigua-based Stanford International was an offshore bank, not a registered broker-dealer, which is what SIPC oversees.

Judge Wilkins' decision was a major blow to victims of the Ponzi scheme, who together lost upwards of $7 billion in certificates of deposit administered by Stanford International. It also carried broader legal significance, marking the first time since the enactment of the SIPA 42 years ago that a federal court had ruled on how much power the SEC has to command a SIPC liquidation.

Because of its precedential nature, a key issue in the Stanford dispute was the standard of proof required of the SEC. The agency argued for a more lenient standard than SIPC did, describing its burden as merely probable cause supported by hearsay.

Judge Wilkins ultimately chose the higher standard requested by SIPC: a preponderance of the evidence. In an SIPC liquidation, an investor must meet a preponderance standard to prove the validity of his or her claim.

In its appellate brief filed in January, the SEC said Judge Wilkins had taken a narrow view of the term “customer.” The agency argued that transactions with Stanford entities should be treated the same way under the SIPA because the company operated “as a single fraudulent enterprise that ignored corporate boundaries.”

“This interpretation of the statute to allow for flexibility in certain circumstances is the correct one, and it is at least a reasonable one that was entitled to deference by the district court,” the SEC said.

But Grundfest and Atkins said in their brief Monday that expanding the “customer” definition was unnecessary and could pose an economic burden to SIPC.

“The SEC's unwarranted expansion of the definition of the term 'customer' would substantially increase the financial exposure of the SIPC fund,” the brief said. “Yet the SEC has presented no economic analysis considering the financial implications of this expanded coverage.”

“The SEC's proposed expansion of SIPC protection, absent even the most rudimentary consideration of any financial consequences, would radically transform SIPA and threaten SIPC's ability to function as Congress intended,” the brief added.

SIPC said earlier this month that the terms of its mission were clear: to protect investors when a member brokerage fails, adding that Judge Wilkins' purportedly narrow view of the term 'customer' was appropriate.

“By its terms, the statute does not insure against fraud or investment losses, instead protecting only the 'customer' property that an SIPC-'member' brokerage firm holds in custody when the brokerage fails,” it said.

The corporation also said the SEC's case was unprecedented because it has not made similar requests in proceedings related to the downfall of a major financial institution.

“In 40 years and over 300 liquidation proceedings — including the recent liquidations of Lehman Brothers Inc., Madoff Investment Securities LLC and MF Global Inc. — this is the first the SEC had ever tried to compel a liquidation,” it said.

Stanford was sentenced in June to 110 years in prison for his role in the fraud.

Grundfest and Atkins were joined on the brief by Simon M. Lorne, the former general counsel of the SEC and securities law professors William J. Carney of Emory University School of Law and Kenneth E. Scott of Stanford Law School.

Grundfest and Atkins are represented by Noah Levine, Steven P. Lehotsky, Joshua S. Press and Albinas J. Prizgintas of WilmerHale.

SIPC is represented by Edwin John U, Eugene F. Assaf Jr., John C. O'Quinn, Michael W. McConnell and Elizabeth M. Locke of Kirkland & Ellis LLP.

The case is U.S. Securities and Exchange Commission v. Securities Investor Protection Corp., case number 12-5286, in the U.S. Court of Appeals for the District of Columbia Circuit.

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