Forensic accountant gives Stanford investors a little hope

February 15, 2011

For two years, Stanford Financial Group's victims have struggled with the grim reality of their situation. Not only is their money gone, but every safety net has failed them. Now, they're hoping a new finding by a forensic accountant will give them a better chance at getting some of their money back.

Last week, investors circulated a declaration by FTI Consulting, an accounting firm hired by receiver Ralph Janvey to determine whether Stanford investors should be covered by the Securities Investor Protection Corp - SIPC.

The ruling found that money that was supposed to buy certificates of deposit at Stanford's Antiguan bank was diverted for other purposes.

The finding "100 percent supports the legal argument we've made" to get investors covered by SIPC, Angela Shaw, the head of the Stanford Victims Coalition, said in an e-mail sent to other investors.

After all, SIPC is covering some of the losses for Bernie Madoff's victims because he never bought the stocks he told clients he'd bought for them.

While the two cases may seem similar, they aren't. Nothing about the accountant's findings in the Stanford case changes SIPC's determination that investors aren't covered, said Stephen Harbeck, SIPC's chief executive. "We don't see a customer that we can protect," he said.

SIPC doesn't cover lost investment value, even if there may be fraud involved. Stanford investors' money may have been diverted, but the CDs did exist and the bank still had records of investors owning them, the accountant's report found. What was falsified, according to the Securities and Exchange Commission, was the assets that backed up those CDs.

Hoping SEC will step in

Stanford investors, though, hope the FTI report will encourage the SEC, which missed so many warnings about Stanford for so long, to ask SIPC to extend the coverage. So far, it hasn't. The SEC could even sue SIPC to compel it to cover Stanford's victims, but that's never happened.

"In this instance, both parties agree that there's no cause to initiate coverage," Harbeck said. "We were not designed to replace the initial purchase price when a security goes down in value."

That, of course, is not what Stanford victims want to hear. And who can blame them? After all, they weren't chasing exorbitant returns on risky investments. They thought they were buying a safe haven low-risk CDs - in a time of market turmoil. In many cases, they were following the advice of their trusted brokers.

Confusing to investors

SIPC is a narrowly defined insurance fund. The arcane details of its limitations have confused investors for years - at least the few who were even aware it existed.

In creating SIPC, Congress was careful to insure against broker misconduct, but not to shield investors from risk that, recent Wall Street bailouts aside, is supposed to be a part of investing.

The Stanford case, though, raises the question of whether that law needs amending. After all, the SEC claims Stanford brokers peddled the bogus CDs, collecting commissions for selling them to clients of the company's brokerage operation, which was a SIPC member.

In other words, SIPC coverage enhanced the veneer of credibility that Stanford used to sell itself to investors, and the FTI report describes a SIPC member firm that was diverting funds from customer purchases without the customers' knowledge. The fact that the alleged fraud wasn't quite as blatant as Madoff's - an obfuscation instead of an outright lie - is a hairline distinction with multibillion-dollar consequences.

Improvements ahead?

Given all the damage from Stanford's collapse, perhaps some good can yet come from the ashes. Perhaps Congress can review the law and build better protections for future investors.

SIPC touts itself as investors' first line of defense. For Stanford investors, it may be their last hope. The forensic accounting declaration makes it very clear that any funds that were intended to buy securities did not in fact reach its purpose; no securities were ever purchased and in fact it was only “fictitious securities.” Fictitious securities have been covered by SIPC in previous cases.

SIPC was denied until now with the excuse that investors got securities, but they are worthless because the Bank got broke and SIPC doesn’t insure worthless securities. But now with this declaration of Karyl Van Tassel, all the victims will get SIPC cover based on previous similar cases.

Nonmember affiliate company were also granted with SIPC cover

SIPC member
Old Naples Securities
First Interregional Equity Corporation
Churchill Securities
New Times Securities Services (New Times)

Nonmember affiliate(s)
Old Naples Financial Services
First Interregional Advisors Corporation
CD Investment Group Churchill Mortgage Investment Corporation
New Age Securities (New Age)

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Hayley wrote on December 4, 2011 at 09:09
Email to
Dear Ms. and Mr.,
The SEC has concluded that some victims who invested money through the Stanford Group Company (SGC) are entitled to the protection of the Securities Investor Protection Act of 1970 (SIPA).

Some other people have invested with a "broker registered in FINRA and representing SGC", and other people have invested with non-member affiliate companies. Are those people also entitled to the protections of the Securities Investor Protection Act of 1970 (SIPA)?

Base on previous similar cases like Old Naples Securities, First Interregional Equity Corporation, Churchill Securities, and New Times Securities Services (New Times), it seems that in our Stanford case it should apply the same, isn't it?