SIPC Rebuffs Stanford Investors Demands to Cover Losses

By Scott Cohn
The agency that insures U.S. brokerage accounts has again rebuffed demands it provide coverage to investors in Allen Stanford’s alleged $7 billion Ponzi scheme, making it increasingly likely the issue is headed to court.

In a December 2 letter to members of Congress, obtained by CNBC, the head of the Securities Investor Protection Corporation (SIPC) says the organization has a “fundamental disagreement” with the Securities and Exchange Commission, which demanded in June that SIPC pay the investors or be sued.

Thousands of investors lost everything in the 2009 collapse of Stanford Financial Group, which the SEC alleges was a global Ponzi scheme involving bogus certificates of deposit.

In the letter to members of Congress, SIPC Chairman Orlan Johnson says providing the coverage would be “unprecedented,” because the investors “chose to purchase CDs issued by an offshore bank in Antigua,” which is not covered by SIPC.

The investors have countered that most of the CDs were purchased through Stanford’s U.S. broker-dealer, a SIPC member.

In June, the SEC sided with the investors and threatened to sue SIPC to force the coverage, which provides as much as $500,000 per account.

SIPC promised to reconsider its position at its September board meeting, but instead has remained publicly silent on the issue.

In the letter to Congress, Johnson claims that privately, SIPC and the SEC have been working “in good faith” to resolve their disagreement.

Neither SIPC nor the SEC would comment on the discussions, which apparently are aimed at settlement to avert a lawsuit by offering a partial payout to investors.

Meantime, patience among the investors and members of Congress is wearing thin.

On Tuesday, Sen. David Vitter, Republican from Louisiana, urged SEC Chairwoman Mary Schapiro to make good on the threat to sue.

“This again is dragging on, six months after your positive, concrete action,” Sen. David Vitter, told Schapiro at a Senate Banking Committee hearing.

I think the SEC needs to take definite action again before the end of the year in a positive way, and I’m afraid that’s going to mean suing SIPC,” Vitter said.

“I share deeply your concern about this and that we not take longer than is absolutely necessary,” said Schapiro in response. But she was non-committal about filing suit. Schapiro said the SEC is working on “the best possible result for victims.”

But the main group representing Stanford’s 28,000 investors says they are entitled to full coverage, and in a letter to the SEC’s general counsel this week, the Official Stanford Investors Committee echoed Vitter’s call for the SEC to go through with the court action.

SIPC is essentially caught between the SEC and its own members–brokerage firms that would bear the cost of any payout while they are already compensating customers of Bernard Madoff and MF Global.

Wall Street’s main trade group, the Securities Industry Financial Markets Association (SIFMA), has come out against coverage for Stanford investors. SIFMA argues SIPC coverage does not extend to fraud, but only guarantees the return of investors’ cash and securities. In the case of Stanford, SIFMA contends, those securities are the certificates of deposit which are now worthless.

A SIFMA spokesperson would not comment on the possibility of a partial payout to investors.

The SEC sued Stanford and his companies in February 2009, putting them out of business. Stanford, 61, has denied wrongdoing.

SIPC Chairman Orlan Johnson’s Letter to Congressman Cassidy
Dear Congressman Cassidy:

This is in reply to your letter dated November 22, 2011, concerning the certificates of deposit (“CD”) issued by the Stanford International Bank Ltd. in Antigua (“Stanford Antiguan Bank”) to your constituents and others…

Letter to Securities Industry and Financial Markets Association (SIFMA)
The SIB CDs did not exist as anything more than a vehicle to steal customer funds. By all definitions,the SIB CDs were never legitimate securities, and customer funds never went to SIB in Antigua. SGC customers had the legitimate expectation they were purchasing actual securities and instead, as the SEC and DOJ have alleged, their funds were stolen in a Ponzi scheme. SGC management, including Chief Financial Officer James Davis, were fully aware of the misappropriation of customer funds and that the CDs were entirely fictitious, yet enticed its Registered Representatives to sell the SIB CDs in order to fund SGC’s operations and pay previous customers.

The SEC has alleged in its civil suit against Stanford, et al, the Stanford Financial Group of Companies operated a “massive Ponzi scheme.” Additionally, the SEC has taken the position in litigation related to the Stanford Receivership that an entity that operates as a Ponzi scheme “is, as a matter of law, insolvent from its inception.” An insolvent entity cannot issue real securities and the SIPA has previously been used to protect investors “regardless of the fact that that the securities were fictitious.”

SGC was an insolvent broker dealer and SIPC member that misappropriated customers’ funds for more than a decade. SGC sold its customers fictitious securities, then acquired its customers’ funds to pay for commissions and bonuses for the Registered Representatives who sold the CDs; SGC’s marketing and advertising; professional endorsements for SGC; and generally all of the expenses of the SIPC member.

In Old Naples Securities, the court reasoned that whether a claimant deposited cash with the debtor “does not … depend simply on to whom the claimant handed her cash or made her check payable, or even where the funds were initially deposited.” Rather, the issue was one of “‘actual receipt, acquisition or possession of the property of a claimant by the brokerage firm under liquidation.'”

SGC customers did not simply make a bad investment; a SIPC member stole our funds. We understand that SIPC was not created to protect investors from worthless securities or securities that decline in value; however, the SIB CDs have no value because the funds were stolen in a Ponzi scheme.

The SIB CDs did not exist and cannot be replacedWhen missing securities cannot be replaced by SIPC, a customer is entitled to compensation of their net equity investments.

Investors Committee’s Letter to SEC
Dear Mark:

As you know, it has been several months since the Securities and Exchange Commission (“SEC”), by a vote of the Commissioners, made a formal request to the Securities Investor Protection Corporation (“SIPC”) Board of Directors to institute a liquidation proceeding of Stanford Group Company (“SGC”) under the Securities Investor Protection Act of 1970 (“SIPA”) and pay net equity claims to SGC customers who purchased Stanford International Bank certificates of deposit (“SIB CDs”).

Despite an initial announcement by SIPC that its Board of Directors would vote on this matter at its September 15 meeting, a decision has apparently been indefinitely postponed. The continued delay by the SIPC Board to respond to the SEC has unnecessarily left the victims in limbo. Additionally, as members of our Committee have discussed with your staff in Washington, we anticipate a significant degree of coordination with a SIPC Trustee will be necessary to prevent unnecessary complications, delays and expenses related to the winding down of other Stanford entities.

In order to provide SGC customers with their mandated protections under SIPA, and to expedite the coordination of additional parties in the multiple legal proceedings, the Investors Committee asks the SEC to immediately exercise its plenary authority over SIPC by filing an application in the Federal District Court in Washington, D.C., to compel SIPC to properly discharge its statutory responsibilities under the SIPA by initiating a liquidation of SGC and paying net equity claims to investors who purchased SIB CDs from SGC.

Visit the Stanford International Victims Group – SIVG official forum http://sivg.org/forum/

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