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.

For a full and open debate on the Stanford Receivership visit:

http://sivg.org.ag/

The Stanford International Victims Group Forum

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."

Federal court hears row over Stanford investor claims / Angela Shaw says she is confused!!

1/24/2012

WASHINGTON, Jan 24 (Reuters) - A hearing in federal court on Tuesday gave the victims of Allen Stanford's alleged Ponzi scheme little clarity after a federal judge said he needed more time before deciding whether an industry-backed fund should be forced to let the investors file claims.

The case before the U.S. District Court for the District of Columbia centers on a dispute between the U.S. Securities and Exchange Commission and the Securities Investor Protection Corp, a non-profit corporation that helps investors recover missing funds in the event a brokerage fails.

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.

His criminal trial began on Monday in Texas. U.S. prosecutors told the jury on Tuesday that Stanford used lies and bribes to steal customers' hard-earned savings.

The SEC in December took formal legal action to try and force SIPC to launch a liquidation proceeding in Texas so that the victims of Stanford's alleged scheme may file claims.

SIPC is standing by its decision not to intervene on behalf of Stanford investors, saying its governing law does not apply to the Stanford bank.

In a three-hour hearing in Washington on Tuesday, a lawyer for the SEC urged the court to compel SIPC to launch a liquidation proceeding.

The SEC also sought to convince District Judge Robert Wilkins that he should leave it to another court to rule on the merits of whether or not certain customers will be eligible for compensation.

"We are not saying a court will never decide the customer question," said Matthew Martens, the chief litigation counsel for the SEC. "There is a time and place for such a determination."

SIPC argues 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. And while Stanford's Texas-based brokerage was a SIPC member, its offshore bank was not.

Eugene Assaf, outside counsel for SIPC from Kirkland & Ellis, said the SEC is trying to punt the matter down to Texas because the agency knows it does not have the facts to back up its argument.

"One of the facts they rely on is from a coalition of people who invested. That is at best double or triple hearsay," said Assaf. "I am skeptical when I don't see facts laid out the way they are normally laid out between litigants."

SIPC said if the judge decides to order it to start a liquidation proceeding, then it in turn will be forced to litigate each matter claim by claim, a process that will cost its fund a lot of money.

Wilkins, who asked skeptical questions of both sides during the hearing, said he would try to rule soon.

Angela Shaw, the founder and director of the Stanford Victims Coalition which says it can show investor money never went to Stanford's bank and was misspent by the brokerage arm, said she was a bit disappointed by Tuesday's hearing.

"I'm confused. There seems to be no sense of urgency," said Shaw, who flew in from Texas for the hearing. "It's going to take time the victims don't have."

The SEC case against SIPC is SEC v Securities Investor Protection Corporation, U.S. District Court, District of Columbia, no. 1:11-mc-00678-RLW.

For the SEC: Matthew Martens of the SEC

For the SIPC: Edwin U of Kirkland & Ellis

(Reporting by Sarah N. Lynch)