THE SECURITIES AND EXCHANGE COMMISSION APPEAL AGAINST SIPC
January 11, 2013
By SEC
The Commission has shown that SIPC should be required to file an application for a protective decree as to Stanford Group Company
in the District Court for the Northern District of Texas.
In denying the Commission's application, the district court made two reversible errors:
First, it incorrectly applied a heightened preponderance standard of proof to the Commission's application rather than the more
appropriate probable cause standard. Congress created in SIPA a specific process, within the context of a SIPA liquidation, in
which investors must prove their claims for coverage under the Act, including their "customer" status, by a preponderance of the
evidence. It makes no sense to apply the same standard to the Commission in proving "customer" status on behalf of investors in
this preliminary, summary proceeding.
Moreover, Congress's overarching goals of promoting investor confidence in the securities markets by providing speedy relief for
investors indicate that a lesser standard of proof should apply to the initial question of whether SIPC should initiate a
liquidation. Indeed, perhaps in recognition of this, SIPC itself is held to a lesser standard when it applies to begin a
liquidation. The district court was therefore incorrect in applying a higher standard of proof to the Commission, which is SIPC's
plenary supervisor.
The district court's error in this regard was based upon the mistaken belief that the application of the provisions of the Exchange
Act to SIPA shows a congressional intent to apply the preponderance standard. But there is no sound basis to analogize plenary
proceedings under Exchange Act Section 21(e)—used to finally determine whether a permanent injunction should be granted—to this
preliminary, summary proceeding used to determine whether SIPC should be required to apply to begin a liquidation proceeding.
Second, the district court incorrectly interpreted SIPA's customer definition to exclude investors who, because of the unusual
operation of the Stanford companies, should be deemed to have deposited cash with SGC. The record here provides at least probable
cause to believe that the purported legal separateness of SGC and SIBL should be disregarded, such that, by depositing cash with
SIBL, SGC accountholders who purchased SIBL CDs through SGC were effectively depositing cash with SGC. Courts facing similar
circumstances have disregarded the corporate separateness of SIPC members and non-member affiliated companies, with SIPC's support.
The district court's contrary approach improperly elevates form over substance by strictly adhering to the corporate boundaries of
the Stanford entities which were designed to perpetrate an egregious fraud.
Even apart from the lack of genuine separateness of the corporate entities, SIPA's "customer" definition includes those who can be
deemed to have deposited cash with a broker-dealer under the Old Naples and Primeline cases. Those cases rejected the
notion that "customer" status requires that cash be deposited directly with the broker-dealer, and held that investors in certain
circumstances fell within the "customer" definition. Those cases are materially indistinguishable from this one, and the district
court's belief otherwise was based on a misunderstanding both of those cases and of the record here.
Finally, the Commission's interpretation of SIPA's "customer" definition is the correct one and is, at the very least, a reasonable
one entitled to deference under Chevron. The district court declined to give such deference because it perceived an
inconsistency between the interpretation and certain past statements of the Commission. The Commission's past statements, however,
clearly state only a general presumption and are fully consistent with the Commission's interpretation in this matter.
INITIAL BRIEF OF THE SECURITIES AND EXCHANGE COMMISSION, APPELLANT.
READER DISCUSSION
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