The SIPC asked the appeals court to affirm U.S. District Judge Robert L. Wilkins’ decision dismissing the agency’s application to compel the SIPC to pay the fraud victims’ claims through a liquidation proceeding.
A top agency official had originally agreed that the SIPC did not owe funds under the Securities Investor Protection Act, SIPC claims, but that changed after U.S. Senator David Vitter, R-La., threatened to block the nominations of two SEC officials in June 2011, the SIPC said.
“The record shows that the SEC’s general counsel agreed that SIPA did not apply to the Stanford case,” the SIPC said. “It was only two years later that the SEC sought to force SIPC’s hand, apparently bowing to pressure from a U.S. senator,” referencing a June 14, 2011, press release from Vitter.
The corporation, funded by the brokerage industry to cover investors who lose money in failing firms, also claims the SEC didn’t seek a liquidation until two years after its 2009 case against Stanford.
“If the SEC had thought the Stanford fraud was within the scope of what SIPA protects, it was under a legal obligation to notify SIPC immediately,” the SIPC said. “The SEC did not do so, even though it filed an enforcement action against Stanford and secured the appointment of a receiver over U.S. Stanford assets in February 2009.”
On July 3, Judge Wilkins ruled that Stanford’s U.S.-based Stanford Group Co. was a member of the SIPC, but that the Antigua-based Stanford International Bank was not. Stanford International Bank Ltd. was an offshore bank, not a registered broker-dealer, which is what the SIPC oversees, Judge Wilkins said.
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 Bank. It also carried broader legal significance, marking the first time since the enactment of SIPA 42 years ago that a federal court had ruled on how much power the SEC has to command a SIPC liquidation.
The U.S. Supreme Court has ruled that brokerage customers cannot force such proceedings, but that the SEC has the authority to do so.
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 the SIPC did, describing its burden as merely probable cause supported by hearsay. Judge Wilkins ultimately chose the higher standard requested by the 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 too-narrow view of the term “customer.” The agency argued that transactions with both Stanford entities should be treated the same way under 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.
The SEC added that it was not seeking customer status for all Stanford investors, but only for those who held accounts with Stanford Group Co., purchased fraudulent certificates of deposit through SGC and deposited funds with Stanford International Bank Ltd.
But SIPC said Monday 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,” the corporation added.
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 ofLehman Brothers Inc., Madoff Investment Securities LLC, and MF Global Inc. — this is the first the the SEC had ever tried to compel a liquidation.”
Stanford was sentenced in June to 110 years in prison for his role in the fraud.
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.