Judge Hands SEC Initial Victory in Suit Against Insurance Fund
February 10, 2012
By ANDREW ACKERMAN
A federal judge Thursday handed the Securities and Exchange Commission a partial victory in its suit against an agency that insures U.S.
brokerage accounts to force it to pay investors in R. Allen Stanford's alleged $7 billion Ponzi scheme.
U.S. District Court Judge Robert Wilkins ruled the SEC didn't need to go through a full-fledge civil trial to force the Securities Investor Protection Corp. to start a liquidation proceeding to begin compensating Mr. Stanford's victims.
Judge Wilkins ruled that a trial, which SIPC sought, didn't comport with the agency's purpose of providing "prompt, summary proceedings" when a securities firms fails. Instead, he ordered a "summary proceeding," that would be fully briefed by the end of February.
But it wasn't a total legal victory for the SEC. The agency had essentially argued that it could determine on its own if SIPC had failed in its responsibilities. "This contention is untenable," Judge Wilkins wrote. "This determination must be made by the court, not unilaterally by the SEC."
In a statement, SEC Chief Litigation Counsel Matthew Martens said the agency is pleased with the judge's decision to expedite the case in lieu of "full-blown litigation that could drag on for years and greatly delay relief to the Stanford investors."
"We look forward to a prompt resolution of this important matter so that claimants can have the chance to seek judicial review of their claims," he said.
A spokesmen for SIPC couldn't be reached for comment.
Federal prosecutors and the SEC charged Mr. Stanford in 2009 with fabricating high returns to lure investors around the world to buy about $7 billion of fictitious certificates of deposit from Stanford International Bank Ltd. in Antigua, the island where he was knighted. Mr. Stanford is alleged to have misappropriated billions of dollars of investor money and invested an undetermined amount in unprofitable private businesses he controlled. He has denied the charges and his trial began last month.
The SEC filed its lawsuit against SIPC in December, after negotiations between the two agencies reached an impasse on the Stanford matter. It is the SEC's first lawsuit against SIPC in the insurance fund's 42-year history.
The dispute hinges on how SIPC's mission is interpreted and builds on the SEC's bid to protect investors more aggressively in the wake of several high-profile missed cases. SIPC maintains a special reserve fund authorized by Congress to compensate investors who lose money in failed brokerage firms.
The SEC, several lawmakers and numerous Stanford customers contend SIPC should use its powers to help Mr. Stanford's alleged victims. SIPC says it can't do so because Mr. Stanford's alleged victims didn't lose money in a failed brokerage firm; they bought CDs issued by a bank and continue to hold those assets, even if they are worthless.
The SEC said in June that it disagrees with SIPC's stance and authorized the lawsuit if SIPC didn't begin a liquidation of Stanford Group, a U.S.-based broker-dealer through which Mr. Stanford sold the certificates to American investors.
Roughly 7,800 people bought their CDs through Stanford Group, which is a SIPC member, according to estimates by the court-appointed receiver in the case, Ralph Janvey. In its June analysis, the SEC argued that SIPC's position elevates form over substance and ignores the fact that Stanford allegedly structured the various entities of his financial empire principally to carry out a single fraudulent Ponzi scheme.
Even if the SEC ultimately prevails in its suit against SIPC, Judge Wilkins signaled Thursday it wouldn't immediately lead to relief for Mr. Stanford's victims. A Texas court overseeing Mr. Janvey would ultimately decide on the merits of any claims filed by former customers, Judge Wilkins said.
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