The U.S. Securities and Exchange Commission said it will appeal a federal judge’s ruling that blocked it from ordering the Securities Investor Protection Corp. to compensate victims of R. Allen Stanford’s $7 billion fraud.
The SEC, in a filing today in federal court in Washington, said it will ask the U.S. Court of Appeals to decide whether SIPC, an industry fund that covers losses from brokerage firm failures, bears responsibility for the 7,000 clients who invested in Stanford’s Ponzi scheme.
U.S. District Judge Robert Wilkins on July 3 said the SEC failed to show that those victims met the definition of “customer” under the Securities Investor Protection Act, which set up the nonprofit fund run by the brokerage industry. He declined to order a liquidation proceeding in federal court in Texas, where the unwinding of Stanford’s firm is taking place.
“We’re certainly going to defend ourselves and the judge’s opinion,” Stephen Harbeck, the fund’s president, said in a phone interview. “The decision below will be affirmed, but it will take some time.”
A federal jury in Houston convicted Stanford on March 8 on 13 of 14 charges brought in connection with his Ponzi scheme, including four counts of wire fraud and five of mail fraud. He was sentenced on June 14 to 110 years in prison.
The SEC told SIPC in June 2011 to start a process that could grant as much as $500,000 for each Stanford client -- the same maximum amount it offers in other cases. After SIPC balked, the SEC sued the congressionally chartered group for the first time.
SIPC argued in court that there was no basis for requiring it to guarantee investments at an entity that isn’t a member, such as Antigua-based Stanford International Bank. The organization also said it doesn’t guarantee an investment’s value, protect against fraud or cover investments with offshore banks.
SIPC covers the damages of individual investors who lose money or securities held by insolvent or failing member brokerage firms. It agreed to pay victims of Bernard Madoff’s multibillion-dollar Ponzi scheme and investors who may have lost money in the October collapse of commodities broker MF Global Holdings Ltd. (MFGLQ)
Harbeck said SIPC didn’t get involved in the Stanford losses because investors received actual certificates of deposit after the brokerage passed their money to a bank. What happened after that isn’t under SIPC’s purview because the Stanford account holders have possession of their securities, he said.
The Securities Investor Protection Act “does not even permit, much less require, the initiation of a liquidation for purchasers of the offshore bank certificates of deposit at issue here,” SIPC said in a court filing.
The SEC decided that there was no true separation between Stanford’s bank and the brokerage firm. Customers who made investments with the bank were effectively depositing money with the brokerage and should get SIPC coverage, the SEC said in court filings.
The case is Securities and Exchange Commission v. Securities Investor Protection Corp., 11-mc-00678, U.S. District Court, District of Columbia (Washington).
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