In exercising its discretionary authority under SIPA and based on the totality of the facts and circumstances of the case, the Commission asked the Securities Investor Protection Corporation (SIPC) to initiate a court proceeding under SIPA to liquidate the broker-dealer.
According to its 2009 complaint, the SEC alleged that Allen Stanford operated a Ponzi scheme in which certain investors were sold certificates of deposit (CDs) issued by Stanford International Bank Ltd. (SIBL) through the Stanford Group Company (SGC). SGC is a SIPC Member.
In an analysis provided to SIPC, the SEC explains that, on the specific facts of this case, investors with brokerage accounts at SGC who purchased the CDs through the broker-dealer qualify for protected “customer” status under SIPA.
In reaching its determination, the SEC cited the conclusions in the report of the court appointed-receiver for SGC, who noted that the many companies controlled and directly or indirectly owned by Stanford “were operated in a highly interconnected fashion, with a core objective of selling” the CDs.
Among other things, the receiver also noted that “[c]orporate separateness was not respected within the Stanford empire. … Money was transferred from entity to entity as needed, irrespective of legitimate business need. Ultimately, all of the fund transfers supported the Ponzi scheme in one way or another, or benefitted Allen Stanford personally.”
The Commission further determined that, in light of all of the facts and circumstances in this case, the customers’ claims should be based on their net investment in the fraudulent CDs used to carry out the Ponzi scheme.
A SIPA liquidation proceeding would allow investors with accounts at SGC to file claims with a trustee selected by SIPC. The trustee would decide whether the investors have “customer” claims that are protected by the statute. An investor who disagreed with the trustee’s determination could seek court review.
The Commission has authorized its staff to file an action in federal district court under SIPA to compel SIPC to initiate a liquidation proceeding in the event SIPC does not do so.
On February 17, 2009, the SEC filed an action in the U.S. District Court for the Northern District of Texas alleging that Stanford orchestrated an $8 billion fraud based on false promises of guaranteed returns related to certificates of deposit (“CDs”) issued by the Antiguan-based Stanford International Bank (“SIB”). The SEC’s Complaint alleged that SIB sold approximately $7.2 billion of CDs to investors by promising returns that were “improbable, if not impossible.” Complaint, SEC v. Stanford International Bank, Ltd., et al., Case No. 3-09CV0298-L (N.D. Tex. filed February 17, 2009).
In response to the SEC’s request for emergency relief, the Court immediately issued a temporary restraining order, froze the defendants’ assets, and appointed a receiver to marshal those assets. The SEC filed a second amended complaint on June 19, 2009, alleging that Stanford conducted a Ponzi scheme.
SIPC President and CEO Stephen Harbeck said that SIPC would take the SEC’s referral in the Stanford case under advisement before deciding how to proceed. He indicated that a decision would be forthcoming in the near future.
Harbeck said: “SIPC’s Board will review the referral, and analyze the SEC’s underlying documentation as quickly as possible.”
The SEC’s referral of this matter this week is the first time the SEC has informed SIPC of the possibility that the Stanford matter is appropriate for a proceeding under the Securities Investor Protection Act (“SIPA”).
The Securities Investor Protection Corporation is the U.S. investor’s first line of defense in the event a brokerage firm fails, owing customers cash and securities that are missing from customer accounts. SIPC either acts as trustee or works with an independent court-appointed trustee in a brokerage insolvency case to recover funds.
The statute that created SIPC provides that customers of a failed brokerage firm receive all non-negotiable securities – such as stocks or bonds — that are already registered in their names or in the process of being registered. At the same time, funds from the SIPC reserve are available to satisfy the remaining claims for customer cash and/or securities custodied with the broker for up to a maximum of $500,000 per customer. This figure includes a maximum of $250,000 on claims for cash. From the time Congress created it in 1970 through December 2010, SIPC has advanced $ 1.6 billion in order to make possible the recovery of $ 109.3 billion in assets for an estimated 739,000 investors.