The U.S. Securities and Exchange Commission can’t force a brokerage account insurer to pay victims of R. Allen Stanford’s $7 billion fraud because their purchases weren’t covered, an appeals court ruled.
The U.S. Court of Appeals in Washington said the 7,000 investors in certificates of deposit sold by Stanford didn’t qualify as customers of a brokerage who would be insured by the Securities Investor Protection Corp., as the SEC argued. The CDs were bought at Antigua-based Stanford International Bank LLC, which wasn’t a SIPC member, the court said.
The Stanford case is the first in which the SEC has gone to court to force SIPC to extend coverage. SIPC, a nonprofit corporation funded by the brokerage industry, has come under criticism from U.S. senators for allegedly favoring its Wall Street members over fraud victims in recent years.
In a July 11 letter to President Barack Obama, a group of eight Southern senators led by Thad Cochran, a Mississippi Republican, expressed dissatisfaction with SIPC’s “inherent conflict of interest” and proposed filling SIPC vacancies with nominees who place a premium on investor protection. Four slots on SIPC’s board, including chairman and vice-chairman, are either vacant or occupied by a member with an expired term, according to the letter.
“The previous chairs of the board were only interested in protecting Wall Street,” Senator David Vitter, a Republican from Louisiana who co-signed last week’s letter, said in a statement today. “The President has an opportunity to fix that now with new nominees.”
Vitter urged the SEC to appeal the ruling to the Supreme Court.
A congressionally chartered corporation, SIPC pays claims of as much as $500,000 a client for missing money and securities through an industry-financed fund, which stood at $1.9 billion in October, according to a SIPC spokesman.
In June 2011, the SEC told SIPC to start a liquidation process in federal court in Texas to handle more than $1 billion in possible claims tied to the Stanford fraud. SIPC balked and the SEC sued in December of that year to compel coverage.
John Nester, a spokesman for the SEC, said the regulator is reviewing the court’s decision and declined to comment further. SIPC President Stephen Harbeck applauded the court’s decision while extending sympathy to “victims of the Stanford Antigua bank fraud.”
“SIPC’s focus remains where it always has been: protecting customers against the loss of missing cash or securities in the custody of failing or insolvent SIPC member brokerage firms,” Harbeck said in an e-mailed statement. “We will continue to work with the mandate of the Securities Investor Protection Act to protect customers in the manner that always has been intended.”
Stanford was convicted of multiple counts of wire fraud, mail fraud and other charges in March 2012 and sentenced to 110 years in prison.
The SEC had argued that SIPC should consider the relationship between Stanford’s bank and the brokerage. Money spent on the CDs came back to Stanford-controlled entities in the U.S., the SEC said.
In its ruling today, the court reasoned that the investors who purchased CDs from the Antiguan bank acted as lenders, giving cash in exchange for a promise to be repaid with a fixed rate of return. The investors “invested in, not through” the Antiguan bank, the court said.
“The CD proceeds thus became part of the consolidated entity’s ‘capital,’ triggering the statutory exclusion from ‘customer’ status for lenders,” the appeals panel said.
SIPC agreed to pay victims of Bernard Madoff’s Ponzi scheme, in which $17 billion of principal disappeared according to the U.S., as well as investors who lost money in the collapses of Lehman Brothers in September 2008 and the MF Global Holdings Inc. commodities brokerage in October 2011.
The case is Securities and Exchange Commission v. Securities Investor Protection Corp., 12-5286, U.S. Court of Appeals for the District of Columbia (Washington).
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